Glaxo, IRS face off over $1.9B loophole

The taxman cometh for GlaxoSmithKline. Like the Grim Reaper, the Internal Revenue Service has shown up at the drugmaker's door, demanding back taxes, interest and penalties. The total? As much as $1.9 billion.

Whoa. That's some kind of tax bill. Apparently the IRS contends that Glaxo used a fancy accounting trick to avoid paying taxes. Common among multinational companies, the practice of "earnings stripping" uses intercompany loans to create tax deductions. The U.S. tax agency isn't keen on the idea, especially now that President Obama is homing in on corporate tax loopholes.

But Glaxo aims to fight the IRS claim. And there's not likely to be an answer for some time; if the case has to make its way through tax court, then a decision isn't expected till 2011. Whenever the decision comes down, it will be closely watched, tax attorneys told the Wall Street Journal, because multinationals of all stripes have used the strategy. So stay tuned.

- see the Wall Street Journal scoop
- read the Reuters story