GSK accused of earnings stripping

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Jesses Drucker is a good tax journalist, and I’ve had the privilege of working with him. In a new Wall Street  Journal article he notes (and I apologise – you may have to pay to read the rest of this):

GlaxoSmithKline PLC is embroiled in a potential $1.9 billion court battle with the Internal Revenue Service, which says the drug maker owes back taxes, interest and penalties 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 U.S. tax return, but no money ultimately leaves the parent company's coffers, and publicly reported profit is unchanged.

"The ability of U.S. subsidiaries of foreign multinationals to strip away earnings like this is a problem" because it significantly reduces the U.S. corporate-tax base, says Reuven Avi-Yonah, a former corporate tax attorney and now director of the international-tax program at the University of Michigan Law School.

What’s in dispute? That when GSK was created a Swiss structure was used to be the parent for the US operations and that substantial intra-group payments were made to this Swiss structure which GSK claims were interest and so tax deductible. But the IRS says they were dividends and not tax deductible.

That’s the face value transaction. But underneath it, as Jesse implies, is the suggestion that this was income shifting to a low tax regime that the IRS wants to challenge.

They’re right to do so. Major corporations cannot be allowed to undermine the societies on which they are dependent to make their profits. Good luck to the IRS in this one.