By JESSE DRUCKER
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. FULL STORY