THE largest tax dispute in history has been settled between the US Internal Revenue Service (IRS) and GlaxoSmithKline (GSK), the drugs company, which has agreed to pay the American fiscal authorities $3.1billion (£1.66 billion) in taxes and interest to end a row over transfer pricing.

GSK said that the final payment fell within a £2.2 billion provision made by the company for tax liabilities. The pharmaceutical giant was exposed to a potential liability of $11.5 billion for 16 years of tax accounts between 1989 and 2005 that were disputed by the IRS. Shares in GSK reacted positively to the settlement yesterday, gaining 10p to £14.79.

At the core of the dispute was a quarrel between two tax authorities, the IRS and HM Revenue and Customs in Britain, over how to divide the spoils of Zantac, the blockbuster ulcer treatment that was developed by Glaxo, GSK’s predecessor. The argument between GSK and the IRS was about where the Zantac profit was earned and how much of the product’s value should be attributed to each jurisdiction. Developed and manufactured in the UK but widely sold in America, the US tax bill depended on the transfer price — the value at which the drug was transferred to the group’s US marketing subsidiaries.

The zeal with which the IRS has pursued its claim reflects rising tensions between tax authorities as they seek to capture profits that can move between jurisdictions at the stroke of an accountant’s pen.

“We have consistently said that transfer pricing is one of the most significant challenges for us in corporate tax administration,” Mark Everson, the IRS commissioner, said. “The settlement of this case sends a strong message of our resolve to continue to deal with this issue.”

GSK faces further unrelated transfer-pricing litigation in the UK, Japan and Canada, mainly relating to its legacy Glaxo drugs.

The settlement with the IRS had not set a precedent for its other transfer-pricing cases, said a spokeswoman, who indicated that the company had been frustrated by the failure of the American and British jurisdictions to find a compromise within the scope of the tax treaty between the two nations.

The hard line taken by the IRS in pursuing its claim for tax owed from 1989 to 2000 reflects growing competition between rival national revenue authorities to secure access to the largest pools of taxable income. It also reflects suspicion among tax authorities that multinationals are using transfer pricing to hide profits offshore and in lower tax jurisdictions.

GSK said yesterday it was pleased that the case had been settled within the scope of its provision and with no significant impact on earnings.

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