Extended Background

GSK, a leader in the pharmaceutical sector, developed breakthrough drugs through UK-based research and intellectual property. However, major value was also created through its intensive US marketing and distribution network. This difference in business functions sparked a fundamental question: Should profits be split based on where drugs are invented, or where they are branded and sold?

GSK adopted a traditional TP structure: UK R&D entities owned patents and supplied the US affiliate, which handled all local marketing. This split mimicked industry norms before BEPS and the OECD overhaul on intangibles, with MNEs emphasizing legal ownership as the basis for profit allocation.

Detailed Arguments

Taxpayer

• Claimed value centered on UK R&D and legal ownership of patents.
• Used the Comparable Uncontrolled Price (CUP) method and profit splits reflecting historic regulatory practice.

Tax Authority (IRS)

• Asserted that US-side marketing created valuable local intangibles not fully captured by the legal-owner model.
• Cited economic substance, seeking a method that attributed more profit to the US role—pushing for a residual profit split and higher return for the US side.

Court Reasoning

• Recognized that historic reliance on legal form was insufficient when economic substance (i.e., US marketing investment) created non-trivial intangibles.
• Emphasized evidence showing distinctive brand value was created domestically.

Procedural Journey

• Years of IRS audits and administrative litigation followed by settlement negotiations.
• Ultimately, GSK agreed to a $3.4 billion settlement and dropped its mirror refund case, closing the dispute.

Implications Beyond the Case

• Set a “marketing intangibles” precedent, forcing all global pharma MNEs to reassess their profit splits in light of where economic value is created.
• Anticipated the OECD’s post-BEPS shift toward substance over form.
• Compliance takeaway: Comprehensive documentation of where intangibles are actually developed and exploited is now essential.
• Advanced pricing agreements (APAs) must rigorously defend both legal and economic value attribution.

Original Case Link:

IRS GSK settlement press release (PDF)