Glaxo faces tax bill bombshell

DAVID HELLIER

and MAGNUS GRIMOND

There are growing concerns in the City that Glaxo Wellcome, the pharmaceutical giant, faces a far greater tax liability than previously thought as a result of its disputed transfer pricing policy.

In US filings the company has already admitted to a potential liability of pounds 463m in the years from 1987 onwards, but this takes no account of possible tax owed by the company, and interest on that tax, prior to 1986.

Last week the High Court ruled that the Inland Revenue is free to pursue the company for back tax incurred prior to 1986, the normal time limit.

According to US filings, Glaxo Wellcome has benefited by pounds 463m from its special tax status in Singapore for the past eight years alone, compared with what it might have paid under the applicable UK statutory corporation tax rates.

Glaxo insists that it has fully provided for all possible tax liabilities but refuses to disclose the amount. It is understood that the company believes disclosure could reinforce the Revenue's case.

Last week's ruling enables the Revenue to pursue tax that has been the subject of dispute with the company for at least 19 years. Added to the company's tax liability is the interest on any unpaid tax which, experts say, could run into many millions.

In notes to its accounts, Glaxo Wellcome states that it has manufacturing operations in Singapore, which were wholly exempt from Singapore tax until 30 June 30 1992, and are now taxed at a reduced rate until 30 June 1997. The effect of the special tax status in Singapore is shown in the US filings for the period between 1987 and 1994.

According to the judgment from last week's High Court case, Glaxo's former finance director and later chairman, Sir Paul Girolami, was in correspondence with the Revenue about the disputed tax situation as far back as 1976.

The 1977 Glaxo accounts, which were audited by Coopers & Lybrand, state that "the tax liabilities of certain UK and overseas subsidiaries have not been fully agreed with the appropriate Revenue authorities for a number of years".

Transfer pricing is the method by which subsidiaries of multinationals account for sales between different subsidiaries. It can involve a company legitimately managing its pricing policy between subisidiaries to maximise the profits shown in low tax regimes, such as Singapore, and minimise the profits shown in high tax regimes.

The tax benefit in this case is likely to relate chiefly to Zantac, the anti-ulcer drug which was behind Glaxo's phenomenal growth in the 1980s. Sales of Zantac, which is manufactured in Singapore, started in 1981. It later became the world's largest selling drug.

A Glaxo spokesman said that adequate provisions had been made for the taxation liabilities and furthermore the judgment made last week did not change the liability because it was only a procedural ruling. The case was brought by Glaxo to clarify the law relating to transfer pricing.

Earlier this year, Glaxo completed the pounds 9bn takeover of Wellcome to create the largest drugs group in the world. In its offer document, Glaxo said the tax liabilities of certain UK and overseas subsidiaries had not been "finally agreed with the appropriate revenue authorities for a number of years".

However, it added that Glaxo's directors considered the amounts provided by the company and Wellcome were "adequate" to meet any further liabilities.

The Government has committed itself to introducing legislation in the next Finance Bill to remove any doubt about the powers of the Inland Revenue to make adjustments to tax assessments which have not been settled and where transfer pricing is in dispute.