GSK Annual Report 2002

Notes to the financial statements GlaxoSmithKline 91
12 Taxation
2001 2000
Taxation charge based on profits for the period
2002
£m
(restated)
£m
(restated)
£m
UK corporation tax at the UK statutory rate 479 838 928
Less double taxation relief (117) (351) (384)
362 487 544
Overseas taxation 1,036 876 1,242
Deferred taxation 29 (53) (55)
1,427 1,310 1,731
Share of taxation charge of associates 34 23 16
1,461 1,333 1,747
2001 2000
Reconciliation of the current taxation rate on Group profits 2002 (restated) (restated)
% % %
UK statutory rate of taxation 30.0 30.0 30.0
Overseas taxes 0.1 (1.1) 2.2
Average Group tax rate 30.1 28.9 32.2
Effect of special tax status in manufacturing locations (3.9) (3.7) (3.2)
Share option deductions in the USA (0.2) (1.1) (0.8)
Merger and restructuring costs 0.7 5.4 0.2
R&D credits not previously recognised (1.2) (0.9) (1.1)
Other permanent differences (0.8) (0.4) 1.4
Capital allowances in excess of depreciation (0.5) – (0.2)
Intra-Group profit 1.3 1.3 (1.2)
Reversing timing differences on tax losses – (2.5) (0.2)
Other timing differences 2.3 3.9 2.5
Prior year items (2.4) (0.7) –
Current tax rate on ordinary activities 25.4 30.2 29.6
Capital allowances in excess of depreciation 0.5 – 0.2
Intra-Group profit (1.3) (1.3) 1.2
Reversing timing differences on tax losses – 2.5 0.2
Other timing differences (2.3) (3.9) (2.5)
Share of associates’ taxation 0.6 0.5 0.3
Prior year items 3.6 1.5 –
Tax rate on ordinary activities 26.5 29.5 29.0
The Group operates in countries where the tax rate differs to the UK rate. The standard rate of tax for the Group has been estimated by
aggregating the local standard tax rates and weighting these in proportion to accounting profits. Profits arising from manufacturing
operations in Singapore, Puerto Rico and Ireland are taxed at reduced rates. The effect of this reduction in the taxation charge increased
earnings per share by 3.6p in 2002, 2.7p in 2001 and by 3.2p in 2000.
The integrated nature of the Group’s worldwide operations, involving significant investment in research and strategic manufacture at a
limited number of locations, with consequential cross-border supply routes into numerous end-markets, gives rise to complexity and delay
in negotiations with revenue authorities as to the profits on which individual Group companies are liable to tax. Disagreements with, and
between, revenue authorities as to intra-Group transactions, in particular the price at which goods should be transferred between Group
companies in different tax jurisdictions, can produce conflicting claims from revenue authorities as to the profits that fall to be taxed in
individual territories. Resolution of such issues is a continuing fact-of-life for GlaxoSmithKline.
In the USA, for a number of years, GlaxoSmithKline has had significant open issues relating to transfer pricing. These issues affect all years
from 1989 to the present and concern a number of products, although the most significant relates to the success of Zantac, in respect of
which the claims of the US Internal Revenue Service (IRS) substantially exceed the Group’s estimation of its taxation liabilities. The IRS
claims, which are not completely quantified, continue to be the subject of discussions between the US and UK tax authorities under the
competent authority provisions of the double tax convention between the two countries. Within these discussions there is a wide variation
between the views of the US and UK tax authorities and, exceptionally, they may be unable to reach agreement to settle the dispute. In
the event of the UK and US tax authorities not reaching agreement, the matter may have to be resolved by litigation.
GlaxoSmithKline uses the best advice in determining its transfer pricing methodology and in seeking to manage transfer pricing issues to a
satisfactory conclusion and, on the basis of external professional advice, continues to believe that it has made adequate provision for the
liabilities likely to arise from open assessments.