Financial Accounting Blog

Monday, March 01, 2004 reports that the United States IRS wants the U.K.-based pharmaceutical giant GlaxoSmithKline to cough up more than $5 billion in taxes, penalties, and interest, more than half of operating cash flow.
"The dispute involves transfer pricing—specifically, the rate Glaxo charged for marketing services supplied by its U.S. affiliate from 1989 to 1996. The IRS maintains that the rate was far too low, and thus vastly understated Glaxo's income subject to U.S. tax during that period. New rules would radically change how the U.S. tax authority treats services supplied to parent companies by affiliates in other tax jurisdictions."
"Some worry that the new rules could subject multinational companies to huge increases in U.S. taxes. Under current tax rules, transfer pricing of services can be reported at cost as long as those services are deemed not integral to the business. The proposed new rules do away with the safe harbor for nonintegral services. Instead, they require those services to be priced, for starters, at cost-plus (called the simplified cost-based method)."