AstraZeneca (LSE: AZN) has settled a long-running transfer pricing dispute with HM Revenue & Customs (HMRC) in the UK. The settlement of the claims, spanning a 15-year period between 1996 to the end of 2010, will cost the drug-maker £505m.
The already-provisioned settlement, consequently lowers the 2010 tax rate and increases management’s earnings expectations, AstraZeneca said.
The first instalment of £350m is due in March 2010, which will be followed by a second final instalment of £155m twelve months later. The joint referral of the issue to the UK Tax Court, by AstraZeneca and HMRC, will be now be withdrawn. Additionally the company said the settlement also resolves certain other outstanding tax matters.
Transfer pricing relates to the transfer of intangible assets to subsidiaries, which are often offshore, in order to reduce tax liabilities. AstraZeneca said the complex transfer price considerations have taken many years to resolve, and consequently it has already provided for the settlement in its accounts.
In its full-year results for 2009, the company said it faced a number of transfer pricing audits in a number of jurisdictions around the world. According to AstraZeneca, these disputes usually result in taxable profits being increased in one territory and correspondingly decreased in another. In 2009, the company set aside US$2.3bn to cover all these international audits.
As a consequence of today’s settlement and other tax matters, AstraZeneca said it will release part of its provision into earnings. Furthermore, the FTSE100 constituent stated that its 2010 tax rate will be approximately two percentage points lower than previously expected.
As a result, AstraZeneca has increased its 2010 core earnings target from US$5.75-US$6.15 per share to US$5.90-US$6.30.
Disclosure: The author holds no positions in the company