Glaxo and the Value of Litigation Reserves

Cite this Article
Elizabeth Nowicki, Glaxo and the Value of Litigation Reserves, Truth on the Market (September 12, 2006),

Experts opined yesterday on the announcement of GlaxoSmithKline’s $3.4 BILLION (*BILLION*) settlement with the IRS over litigation related to Glaxo’s transfer pricing.  Transfer pricing, as defined by the WSJ:

“That practice, called “transfer pricing,” is the art of attaching a monetary value to trademarks, patents, research and other intangibles that one arm of a multinational company transfers to another.  Transfer pricing determines how costs are distributed between the far-flung arms of a multinational company, and thus what profit is booked in what country. Higher costs cut into profit, lowering a company’s tax bill, while lower costs do the opposite.”

Do I think that transfer pricing is going to go down the options-backdating road to full-out scandal?  Likely not.  My sense is that there is more ambiguity with timing/cost-allocation decisions than with backdating.  Moreover, I think a good CEO/CFO is “obligated” to look for lawful, fair ways to capitalize on differences in tax rates in various jurisidictions, such that the benefits of lower tax rates can be maximized as appropriate.

The interesting question is whether the good board of directors has or should have transfer pricing on its radar screen as something to think about or ask about.  I doubt it, but perhaps I am wrong.  We’re told that Glaxo will pay the settlement out of the $4+ billion it had set aside in its litigation reserves such that its financial condition will not take a hit.  So clearly the Glaxo directors should have been (and likely were) asking questions when the fund began to be aggressively augmented.   But does the “good” director of Public Widget Conglomerate Corporation need to add transfer pricing to his list of “things to monitor annually”?

P.S.  I like this comment from the WJS: “Chief IRS counsel Donald Korb added that it showed that “our lawyers can go up against the best firms the private tax bar has to offer…and achieve quite successful results.””Â

(a) Defensive much, Mr. Korb?  (Having worked for the SEc, I would not have questioned the skill of the IRS lawyers.  I would have assumed in their favor.)  (b)  I will send a dollar to the person who can tell me who Glaxo’s outside lawyers were.