Tax juggling gave Glaxo pounds 132m boost

Glaxo Wellcome yesterday rejected any suggestion that it had not provided fully for huge potential tax liabilities following revelations that up to half the drugs group's recent earnings growth may have come from international tax juggling.

Accounts filed recently by Glaxo's manufacturing operation in Singapore show that tax provisions released over the past two and a half years to December have boosted group profits by pounds 132m.

In the two years to June 1995, which cover most of this period, Glaxo's after-tax profits - excluding last year's Wellcome acquisition - grew by pounds 255m. This suggests that approaching half the growth in group profits may have been derived from the clever use of tax allowances rather than from the underlying business.

Glaxo yesterday refused to comment on the effect of tax on its recent earnings, although sources confirmed the accuracy of the figures. However, a spokesman for the group reiterated that all past tax liabilities had been fully provided for.

"The Singapore operation was set up 10 years ago and the benefit derived from it in the terms of taxation and profitability has been adequately diclosed and widely known. It has been disclosed in annual reports for many years."

Glaxo's flagging underlying growth revealed by the figures helps explain why the group was so anxious to seal last year's pounds 9.3bn takeover of rival drugs group Wellcome.

The addition of Wellcome is expected to boost future earnings but it now also transpires that, separately, the Singapore businesses were a key element in financing the deal.

Documents show that pounds 2bn, equivalent to a third of the cash element of the total consideration for Wellcome, was transmitted to the UK from Singapore three months after the takeover.

It is also thought the Singapore operation helped refinance disastrous treasury operations in Bermuda, where losses on an ill-judged bond portfolio eventually reached pounds 115m.

The huge gains available to the group in minimising tax also shed light on the drug giant's long-running battle to prevent the Inland Revenue re-opening old tax accounts filed before 1986 to investigate the legitimacy of so-called "transfer pricing" arrangements between international subsidiaries.

Glaxo last year lost a High Court case against the Inland Revenue involving transfer pricing and its appeal to the Court of Appeal was thrown out at the end of 1995. It is now involved in discussions with the tax authorities to see if the matter can be settled out of court, but no early resolution is expected.

The dispute involves early tax years in the 1980s when Glaxo was growing rapidly on the back of Zantac, its best-selling anti-ulcer drug, and is thought to involve the Singapore business. The operation, which makes Zantac, is taxed at a lower rate than typical elsewhere in the world. Last year the original Glaxo group had a tax rate of 29.5 per cent against 37 per cent at the new Wellcome operations.

Notes in Glaxo's accounts have for some years drawn attention to the continuing dispute with the tax authorities.

But the revelation that money was transferred from Singapore sits oddly with a statement by Glaxo last year that no provision beyond that made in the accounts had been made for "taxation which would arise on the distribution of profits retained by overseas subsidiary and associated undertakings on the grounds the profits are retained for use in the business".