Glaxo's Taxes

"GlaxoSmithKline PLC is embroiled in a potential $1.9 billion court battle with the [IRS], which says the drug maker owes back taxes, interest and penalites stemming from tax deductions Glaxo generated essentially by making payments to itself. The dispute centers on a practice known as earnings stripping, in which a multinational company reduces its taxes by claiming interest deductions for payments to a related unit overseas. The company claims deductions on its US tax returns, but no money ultimately leaves the parent company's coffers, and the publicly reported profit is unchanged. ... The tax saving technique used by Glaxo is popular among foreign companies that have large US operations and often is legal. But the strategy has come under greater scrutiny as US authorities crack down on tax-cutting strategies. ... The case comes from the $75.7 billion merger in 2000 of UK rivals GlaxoWelcome and SmithKline Beecham. ... The US operation was then merged into SmithKline's US business, which agreed to pay the Swiss company $13.5 billion over seven years as compensation. GlaxoSmithKline treated a portion of thise payments as tax-deductible interest. ... A typical attraction of such transactions is that the company gets a US tax deduction, while its overseas unit genrally pays lower or no taxes on what it receives, says Robert Willens, who runs a corporate tax-consulting firm. Glaxo didn't disclose in its court filings the tax treatment of the payments in received in Switzerland", my emphasis, Jesse Drucker at the WSJ, 22 May 2009.

I can't tell from this article if I agree with Glaxo or the IRS. Since Glaxo did not disclose these payments Swiss tax treatment, a judge could rule they were not taxable in Switzerland and let Glaxo prove otherwise, like the burden of production in a tax evasion case, see Holland v US, 99 L ed 150 (1954). This case reminds me of Wal-Mart, my 14 January 2008 post: http://skepticaltexascpa.blogspot.com/2008/01/wal-marts-leaky-tax-shelter.html. I went to Glaxo's website and downloaded its 2008 Annual Report. Reading Footnote 14, "Taxation", shed no light on the situation as this tax issue was not disclosed. From what little I saw, I think Glaxo has a big bill to pay and PWC should be strung up for not having Glaxo adequately disclose this situation.