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September 18, 2006
Tax Analysts Obtains Text of 1993 SmithKline Beecham Advance Pricing Agreement

Full Text Published by Tax Analysts®


Document originally published in
Worldwide Tax Daily and Tax Notes Today
on September 18, 2006.

ADVANCE PRICING AGREEMENT
between
SMITHKLINE BEECHAM CORPORATION
SMITHKLINE BEECHAM PHARMACEUTICALS CO.
and
THE INTERNAL REVENUE SERVICE

                           TABLE OF CONTENTS

 I. DEFINITIONS

 II. TERMS AND CONDITIONS OF AGREEMENT

 1. Identifying Information

 2. Covered Transactions

 3. Legal Effect

 4. Term

 5. TPM

 6. Accounting

 7. Critical Assumptions

 8. Compensating Adjustments

 9. Revocation of Agreement

 10. Suspension or Cancellation of Agreement

 11. Revision of Agreement

 12. Renewal of Agreement

 13. Record Retention

 14. Annual Report

 15. Coordination with Domestic Law

 16. APA Examination

 17. Dispute Resolution Process

 18. Confidentiality

 19. Section Captions

 20. Applicable Law

 21. Notice

 22. Effective Date

 III. APPENDICES

 A. Transfer Pricing Methodology

 B. Non-factual Representations

 C. Critical Assumptions

 D. Compensating Adjustments

ADVANCE PRICING AGREEMENT
between
SMITHKLINE BEECHAM CORPORATION
SMITKKLINE BEECHAM PHARMACEUTICALS CO.
and
THE INTERNAL REVENUE SERVICE

This Advance Pricing Agreement is made by and between SmithKline Beecham Corporation (hereinafter referred to as "SBCorp"), SmithKline Beecham Pharmaceuticals Co. (hereinafter referred to as "LabCo") and the Internal Revenue Service acting through the Associate Chief Counsel (International) (hereinafter referred to as "the Service").

WITNESSETH:

Whereas, the Parties to this Agreement wish to establish a method for prospectively determining whether the transfer prices charged for "Dyazide" and "Tagamet" in fiscal taxable years ending 1991, 1992 and 1993 are in accordance with the principles of section 482 of the Internal Revenue Code of 1986, as amended, and attendant regulations; and

Whereas, the Parties have agreed upon a Transfer Pricing Methodology ("TPM") for SBCorp and LabCo concerning the transfer prices to be charged by LabCo for the manufacture and sale of "Dyazide" and "Tagamet" to SBCorp which is consistent with the arm's length standard under section 482 of the Internal Revenue Code of 1986, as amended, and attendant regulations, and the TPM is supported by available and reliable data and will produce, an arm's length result that clearly reflects income and is efficiently administrable, with as little adjustment as possible; and

Whereas, it is expressly understood by the Parties that the service's review and evaluation of SBCorp and LabCo's APA request does not constitute an examination or inspection of SBCorp or LabCo's books and records under section 7605(b) or any other provision of the Internal Revenue Code of 1986, as amended; and

Whereas, SBCorp and LabCo represent that they have acted in good faith in the development and presentation of their APA Request and related submissions, and the Service represents that it has exercised due diligence in its evaluation and review of the submitted materials, and neither SBCorp and LabCo, nor the Service are presently aware of any Material Fact that has been misstated or omitted; and

Whereas, the Parties believe that all terms and conditions in the APA (unless otherwise stated) are consistent with and correspond to the provisions in Rev. Proc. 91-22, 1991-1 C.B. 526; and

Whereas, all other requirements for executing this Agreement have now been satisfied;

Now, therefore, in consideration of the mutual promises herein contained, "the Parties agree as follows:

I. DEFINITIONS

The terms listed below and as used herein shall have the following meanings for all purposes of this APA:

AGREEMENT -- Refers to this Advance Pricing Agreement.

ANNUAL REPORT -- Refers to a periodic report prepared pursuant to section 14 of this APA.

APA -- Refers to this Advance Pricing Agreement.

APA RECORDS -- Refers to records (pursuant to Section 6001 and Section 6038A of the Code or any agreement between SBCorp and the Service regarding the records to be maintained in satisfaction of Treasuxy Regulation 1.6038A-3) sufficient to enable the Service to conduct an examination whether SBCorp and LabCo have complied with the terms of this Agreement.

APA REQUEST -- Refers to SBCorp and LabCo's request for an Advance Pricing Agreement dated August 11, 1992, and all supplemental letters, schedules, documents, representations and information, whether oral, written or in any other medium, submitted or disclosed to the Service in connection with this matter.

APA YEAR -- Refers to a taxable year subject to this Agreement.

CHIEF COUNSEL -- Refers to the Office of the Associate Chief Counsel (International), Internal Revenue Service.

CODE -- Refers to the U.S. Internal Revenue Code of 1986, as amended, and attendant regulations.

COVERED TRANSACTIONS -- Refers to the transactions described in section 2 of this Agreement.

DISTRICT DIRECTOR -- Refers to the Internal Revenue Service's District Director of the Philadelphia District in Pennsylvania.

"DYAZIDE" -- Refers to Triamterene/Hydrochlorothiazide, a diuretic used for the treatment of hypertension and water retention. The patent an "Dyaside" expired on March 12, 1980. The patent had originally been owned by SBCorp under its former name, Smith Kline & French Laboratories, and was transferred to LabCo as a contribution to capital in 1970.

FIELD -- Refers to the Internal Revenue Service examination Division officers and personnel of the Philadelphia District.

FY 1991 -- Refers to SBCorp and LabCo's fiscal and taxable year beginning January 1, 1991 and ending December 31, 1991.

FY 1992 -- Refers to SBCorp and LabCo's fiscal and taxable year beginning January 1, 1992 and ending December 31, 1992.

FY 1993 -- Refers to SBCorp and LabCo's fiscal and taxable year beginning January 1, 1993 and ending December 31, 1993.

GAAP " Refers to Generally Accepted Accounting Principles.

INITIAL TERM -- Refers to the 3-year period during which this Agreement shall remain in effect: FY 1991, FY 1992, and FY 1993.

MATERIAL FACT -- Refers to a fact in existence on or before the date of execution of the APA which, if known to the Service, would have caused the Service to either reject SBCorp and LabCo's APA Request or to pursue terms and conditions in its negotiations with SBCorp and LabCo that are substantially different from those set forth in this Agreement.

NET TRADE SALES -- Sales less returned items, allowances, and any cash discounts, with the understanding that the cash discounts in the case of "Tagamet" sales are not to exceed 2% of the "Tagamet" sales to which the cash discount applies, regardless of the actual cash discount granted.

OTC -- Refers to any Over The Counter sale of medication without a doctor's prescription.

PARTIES -- Refers to SBCorp (Federal Employer Identification No. 23-1099050), a Pennsylvania Corporation engaged in the pharmaceutical and health care business (whose common stock is owned by SmithKline Beecham p.l.c. and whose preferred stock is publicly traded), LabCo (Federal Employer Identification No. 23-1727978), a Delaware Corporation conductina pharmaceutical manufacturing operations in the Commonwealth of Puerto Rico and an electing corporation under the provisions of section 936 of the Code (all of LabCo's stock is owned by SmithKline Beecham Puerto Rico Inc. which in turn is wholly owned by SBCorp), and the Service. The term "Party" refers to either SBCorp, LabCo or the Service.

RENEWAL AGREEMENT -- Refers to an Agreement renewed pursuant to Section 12 of this Agreement.

RENEWAL TERM -- Refers to any time period subsequent to the Initial Term to which the Parties agree to extend this Agreement pursuant to section 12 of this Agreement.

REV. PROC. 91-22 -- Refers to Revenue Procedure 91-22, 1991-1 C.B. 526, as amended as of the date of execution of this Agreement.

REVISED AGREEMENT -- Refers to this Agreement, as it may be subsequently revised or modified pursuant to section 11 of this Agreement.

SALES -- Refers to SBCorp and/or LabCo's total revenue derived from the respective Covered Transactions, less discounts and returns, as calculated in accordance with GAAP.

SERVICE -- Refers to the Internal Revenue Service.

SMITHKLINE BEECHAM -- Refers to any entity worldwide which is a member of the SmithKline Beecham group of companies.

"TAGAMET" -- Refers to cimetidine, a product used in the treatment of ulcers and other gastrointestinal diseases. "Tagamet" was developed by and the worldwide patent rights are owned by a United Kingdom affiliate of SBCorp. The U.K. affiliate originally granted an exclusive license to LabCo on June, 1977, and the license has been amended from time to time. This U.S. "Tagamet" patent expires on May 17, 1994.

TPM -- Refers to the transfer pricing methodology described and explained in section 5 of this Agreement and in Appendix A attached hereto, for prospectively determining whether the Transfer Prices paid by SBCorp concerning Covered Transactions with LabCo are consistent with the arm's length standard and clearly reflect income for purposes of section 482 of the Code.

TRANSFER PRICES -- Refers to the total consideration paid by SBCorp or received by LabCo in money, services or otherwise, for Covered Transactions for purposes of section 482 of the Code.

II. TERMS AND CONDITIONS OF AGREEMENT


    1. Identifying Information.

1.1. SBCorp (Federal Employer Identification No. 23-1099050), is a Pennsylvania Corporation incorporated on June 29, 1929, and engaged in the pharmaceutical and health care business. All of SBCorp's common stock is owned directly or indirectly by SmithKline Beecham p.l.c. and since July 26, 1989, all of SBCorp's outstanding preference stock is publicly owned. SBCorp is an accrual basis taxpayer and files a consolidated Federal income tax return with its includible subsidiaries on a calendar year basis with the Internal Revenue Service Center at Philadelphia, Pennsylvania. SBCorp maintains its principal place of business at One Franklin Plaza, Philadelphia, Pennsylvania and is subject to the audit jurisdiction of the Philadelphia District Director.

1.2. LabCo (Federal Employer Identification No. 23-1727978), is a Delaware Corporation incorporated on July 22, 1970, conducting pharmaceutical manufacturing operations in the Commonwealth of Puerto Rico, and an electing corporation under the provisions of section 936 of the Code. LabCo maintains its principal place of business at Cidra, Puerto Rico. All of the outstanding stock of LabCo is owned by SmithKline Beecham Puerto Rico, Inc. (E.I.N. 51-0305267), a wholly- owned domestic subsidiary of SBCorp. LabCo files its tax return on a calendar year basis with the Internal Revenue Service at Philadelphia, Pennsylvania. LabCo acquired, pursuant to a statutory merger, all of the assets of SK&F Co. (hereinafter referred to as "Co") (E.I.N. 66-027717177) on January 1, 1989. "Co" was also a wholly owned subsidiary of SmithKline Beecham Puerto Rico, Inc. Prior to its merger into LabCo, "Co", like LabCo, conducted manufacturing operations in the Commonwealth of Puerto Rico and was an electing corporation under the provisions of section 936 of the Code.

1.3. The principal representative of SBCorp and LabCo for this Agreement is: Henry J. King, Vice President Taxes, SmithKline Beecham Corporation, One Franklin Plaza, P.O. Box 7929, Philadelphia, PA 19101. Telephone number: (215) 751-4333.


    2. Covered Transactions. This Agreement governs all transactions between SBCorp and LabCo involving the manufacture and sale of two pharmaceutical products, "Dyazide" and "Tagamet".

    3. Legal Effect.


3.1. This Agreement shall bind the Parties to its terms and conditions.

3.2. For each APA Year, SBCorp and LabCo's transfer prices for Covered Transactions shall be calculated in accordance with the TPM set out in this Agreement. In addition, SBCorp and LabCo shall report all items of income, expense, credit and other matters relating to the Covered Transactions for U.S. Federal income tax purposes in accordance with this Agreement, including section 5 of this Agreement and Appendix A attached thereto.

3.3. To the extent SBCorp and LabCo comply with all the terms and conditions of this APA, the Service will, as provided by section 9.02 of Rev. Proc. 91-22, neither contest the application of the TPM to the Covered Transactions nor make or propose any reallocation or adjustment under section 482 of the Code to SBCorp and Labco's income as reported on their U.S. Federal income tax returns concerning the Covered Transactions. Nothing contained herein, however, shall restrict the Service's rights under the provisions of section 16 of this Agreement.

3.4. Notwithstanding anything contained in this Agreement, SBCorp and LabCo shall remain subject to all applicable U.S. Federal income tax laws not directly affected by this Agreement. SBCorp and LabCo are entitled to any benefits or relief otherwise available under all such laws.

3.5. If, for any APA year, the transfer pricing methodology actually employed by SBCorp and LabCo with respect to a Covered Transaction is different from the TPM agreed to in this Agreement, as set forth in section 5 of this Agreement and Appendix A attached hereto, the Parties may revise this Agreement pursuant to section 10.07 of Rev. Proc. 91-22 and section 11 of this Agreement. If the Parties do not execute a revised agreement, the Service may, in the exercise of its discretion, either temporarily suspend this Agreement for the APA Year encompassing the different transfer pricing methodology or cancel this Agreement as of the beginning of the APA Year encompassing the different transfer pricing methodology. In that event, this Agreement will cease to be of any further force and effect concerning the Parties for U.S. Federal income tax purposes for that taxable year and subsequent taxable years pursuant to section 10 of this Agreement. The Service may, however, in the exercise of its discretion, choose to not suspend or cancel this Agreement for any APA Year(s) if the Service believes that the difference between SBCorp and LabCo's actual transfer pricing methodology and the TPM set forth in this Agreement is de minimis and the Service believes that SBCorp and LabCo are otherwise in compliance with this Agreement. During any suspension or cancellation of this Agreement, the tax treatment of the Covered Transactions for the taxable year(s) involved will be subject to all U.S. Federal tax rules. The Parties expressly acknowledge that any decision by the Service not to suspend or cancel this Agreement for failure to comply with the agreed TPM shall not constitute a waiver or relinquishment of the Service's right under this Agreement to suspend or cancel this agreement concerning any other failure of SBCorp or LabCo to comply with the agreed TPM.

3.6. No Party is required to apply the TPM referred to in section 5 of this APA, or any modification thereof, to taxable years outside the Initial Term or any Renewal Term, or concerning transactions or entities not covered by this APA. Further, the Parties may contend in any administrative or judicial proceeding that the application of the formulas or methodologies set forth in the APA, or any modifications thereof, is inappropriate or improper concerning taxable years, transactions, or entities not covered by this APA.

3.7. Except as provided in section 17 of this Agreement or otherwise agreed to by the Parties, this Agreement, and any non-factual oral or non-factual written representations made in the APA Request, can not be introduced as evidence in any judicial or administrative proceeding, whenever or by whomever instituted, concerning any taxable year, transaction or entity not governed by this Agreement. In this regard, the Parties expressly acknowledge that this Agreement and any non-factual oral or non-factual written representations or submissions made in the APA Request constitute a compromise and/or an offer to compromise within the scope of Rule 408 of the Federal Rules of Evidence. The Parties also expressly acknowledge that only matters set forth in Appendix B to this Agreement constitute non-factual representations or submissions made in the APA Request for purposes of section 9 of Rev. Proc. 91-22. Either Party may, however, without reference to this Agreement, (i) contend in any administrative or judicial proceedings that the TPM, or a modification thereof, has application to a taxable year, transaction, or entity not covered by this Agreement; or (ii) cite, rely on, Introduce into evidence, or otherwise utilize any other facts, data, documents, or any economic theory, principle, or analysis contained in the APA Request concerning any administrative or judicial proceeding pertaining to taxable years, transactions, or entities not covered by this Agreement. For example, in accordance with the preceding sentence, any Party may seek to establish independently, without reference to this Agreement, that the TPM contained in this Agreement is applicable to an entity, transaction or year not covered by this Agreement.

4. Term. Except as may be otherwise provided herein (e.g., section 12 captioned "Renewal"), this Agreement shall apply only to the Initial Term.

5. TPM. The TPM determines whether the Transfer Prices paid concerning the Covered Transactions satisfy the arm's length standard for purposes of section 482 of the Code. The TPM is further described and explained in Appendix A attached hereto. The Parties agree that the TPM satisfies the arm's length standard for purposes of section 482 of the Code.


    6. Accounting.

6.1. The determination of whether SBCorp and LabCo's financial performance concerning the Covered Transactions is according to the TPM for an APA Year shall be based upon the financial statements of SBCorp and LabCo.

6.2. The financial statements mentioned under section 6.1 must be reviewed by an independent auditor, and only will be used if the independent auditor certifies that the financial statements present fairly, in all material respects, the financial position of SBCorp and LabCo and the results of their operations. Unless otherwise provided, Sales and Net Trade Sales with respect to the Covered Transactions will be reported in the Annual Report to the Service on the basis of these financial statements. In the Annual Report, SBCorp and LabCo will supply the Service with an explanation of any differences between the final, certified financial statements and the U.S. Federal income tax returns.

7. Critical Assumptions. For purposes of this Agreement, all Critical Assumptions, as defined in section 5.07 of Rev. Proc. 91-22, are stated in Appendix C attached hereto.

8. Compensating Adjustments. For purposes of this Agreement, all Compensating Adjustments, as defined in section 10.02 of Rev. Proc. 91-22, will be computed and made in accordance with the instructions and procedures stated in Appendix D attached hereto.

9. Revocation of Agreement.

9.1. The Service may revoke this Agreement, in whole or in part, in accordance with section 10.05 of Rev. Proc. 91-22. This agreement shall not be revoked solely for minor or inconsequential misstatements or omissions of fact (none of which are Material Facts) contained in or omitted from the APA Request or any Annual Report.

9.2. If the Agreement is revoked under this section, the Service shall provide SBCorp and LabCo with a written statement specifying the grounds for revocation.

9.3. If the Agreement is revoked under this section, then for the APA Years for which the revocation is effective, SBCorp and LabCo shall retain all rights, as though this Agreement had never been executed, which they would otherwise have in connection with the determination of their U.S. Federal tax liability.


    10. Suspension or Cancellation of Agreement.

10.1. The Service may either temporarily suspend this Agreement for a given APA Year or cancel this Agreement for a given APA Year and all subsequent years concerning all or certain Covered Transactions among SBCorp and LabCo in accordance with sections 3 or 17 of this Agreement or section 10.06 of Rev. Proc. 51-22. During suspension, the Agreement is still in force, but suspended for the indicated time. Upon cancellation, the Agreement ceases to be in force. This Agreement shall not be suspended or canceled solely for minor or inconsequential misstatements or omissions of fact (none of which are Material facts) contained in or omitted from the APA Request or any Annual Report.

10.2. If the Agreement is suspended or canceled under this section, the Service shall provide SBCorp and LabCo with a written statement specifying the grounds for suspension or cancellation.

10.3. If the Agreement or any portion thereof is suspended or canceled under this section, then for the taxable year(s) for which the suspension or cancellation is effective, SBCorp and LabCo shall retain all rights which they would otherwise have in connection with the determination of their U.S. Federal income tax liability, as though the suspended or canceled Agreement, or the suspended or canceled portion thereof, had never been executed.


    11. Revision of Agreement.

11.1. This Agreement may be revised by the Parties as provided by subsection 3.5. of this Agreement.

11.2. This Agreement may be also be revised by the Parties if a Critical Assumption is no longer valid for an APA Year.

11.3. The procedures for revising this Agreement are provided for in section 10.07 of Rev. Proc. 91-22.

12. Renewal of Agreement.

12.1. SBCorp and/or LabCo's request for renewal must be made in accordance with section 10.08 of Rev. Proc. 91-22. The mailing procedures for filing a request for renewal must follow the procedures for filing the Annual Report, as provided by section 14 of this Agreement.

12.2. SBCorp and/or LabCo's request for renewal shall generally follow the form and procedure governing the application for this Agreement, but need only include facts, computations, data, information, and documents not already in the APA Request for the Initial Term. A request for renewal may incorporate by reference any materials or relevant parts of a previously submitted APA Request. To the extent, however, that there are changes in Material Facts or if there are changes in Critical Assumptions, these matters shall be set forth in full in the request for renewal.

12.3. The Service will review and evaluate any submitted request for renewal, and will notify SBCorp and LabCo whether the request has been accepted, rejected, or requires the submission of additional information.

12.4. A request for renewal may be withdrawn by SBCorp and/or LabCo in accordance with the provisions of section 6.07 of Rev. Proc. 91-22.

13. Record Retention.

13.1. All reference to Section 6038A of the Code and attendant regulations serves solely to explain the use of the terms in this section. The terms used in this section of the Agreement correspond to how those terms are used in Section 6038A and attendant regulations.

13.2. Pursuant to, and in accordance with, section 10.04 of Rev. Proc. 91-22, SBCorp and LabCo shall maintain APA Records efficient to enable the Service to conduct an examination to ascertain whether they have complied with all of the terms of this Agreement. The APA Records which SBCorp and LabCo are required to maintain must be kept within the United States unless conditions as described in 1.6038A-3(f)(2) of the regulations are met.

13.3. APA Records must generally be made available to the Service within sixty (60) days of a written request. If additional time is needed to locate, assemble and transmit to the Service any requested APA Records, an appropriate extension of time may be granted upon a written request, for good cause shown, in accordance with the standards contained in $ 1.6038A-3(f)(4) of the regulations.

13.4. Should the Service's request for APA Records involve materials that are not in the English language, the Service may request a translation. The translation shall be provided to the Service within thirty (30) days of such request. Appropriate translation extensions may be granted, for good cause shown, in accordance with the standards contained in 1.6038A-3(b)(3) of the regulations."

13.5. If SBCorp or LabCo's failure to maintain APA Records requested by the Service under the provisions of this section is due to reasonable cause, as that term is used in § 1.6038A-4(b) of the regulations, no sanctions may be imposed under this Agreement. Further, the Service may, in the exercise of its discretion, choose not to impose any sanctions under this agreement if SBCorp or LabCo's failure to comply with its request for APA Records is de minimis and SBCorp and LabCo are otherwise in compliance with this Agreement. Thus, for example, in cases where a particular document or group of documents are not furnished upon request, the Service may choose not to impose any sanctions if it deems the document or documents not to be essential concerning SBCorp and LabCo's compliance with this Agreement. The determination whether SBCorp and LabCo have complied with the provisions of subsection 13.1 of this Agreement shall be made in accordance with standards as contained in $ 1.6038(A)-4(c) of the regulations. The Parties expressly acknowledge that any decision by the Service to not impose sanctions for failure to comply with a particular request for APA Records shall not constitute a waiver or relinquishment of the Service's right under this Agreement to impose sanctions with respect to any other failure of SBCorp and/or LabCo to comply with any other request for APA Records.

13.6. If Parties enter into a separate record retention agreement regarding the Covered Transactions, the terms and conditions of the record retention agreement may determine which records must be retained, when and under what circumstances the accords shall be furnished to the Service, sanctions for noncompliance, and such other matters as are covered by the record retention agreement.

13.7. Nothing contained herein, however, shall restrict the Service's right to request any information under any provision of the Code concerning any item of income, expense, credit, allowance, and other matters not related to the Covered Transactions.

14. Annual Report.

14.1. SBCorp and LabCo shall file an Annual Report with respect to each APA year covered by this APA or any Renewal Term in accordance with section 10.01 of Rev. Proc. 91-22. The filing of an Annual Report within ninety (90) days after filing the U.S. income tax return (as provided in section 10.01 of Rev. Proc. 91-22) will be deemed a timely filed Annual Report. In the case of the Annual Report for 1991, the filing of an Annual Report within ninety (90) days after execution of this Agreement will be deemed a timely filed Annual Report.

14.2. The Annual Report will include such facts, computations, data, information, and documents describing all Covered Transactions between SBCorp and LabCo for the APA Year and demonstrating its good faith compliance with the terms and conditions of this APA. For each APA Year, the Annual Report will also include: (i) an analysis applying the TPM referred to in section 5 of this APA to the actual operations for the APA Years reviewed in the Annual Report; (ii) a description of the calculation of the pricing of "Dyazide" pursuant to section 6 of Appendix A; (iii) a description of any changes in Critical Assumptions for the APA Year and the specific reasons therefor, or if in the judgment of SBCorp and LabCo there have been no changes in Critical Assumptions, an affirmative statement to that effect; (iv) a description and analysis of any completed or proposed compensating payments (pursuant to section 10.02 of Rev. Proc. 91-22) between SBCorp and LabCo, if any, including the manner in which any such completed or proposed compensating payments are to be made or were made; (v) a description of how the Section 936(h) payment is calculated; (vi) a calculation of what would have been the results under the profit split method; (vii) a calculation and description of the cost sharing payments for "Dyazide" and "Tagamet"; and (viii) a calculation and description of the marketing expenses that apply to Covered Transactions.

14.3. All Annual Reports filed pursuant to this APA shall include a balance sheet reflecting the beginning and end of the APA Year and a statement of income and retained earnings for the APA Year and the preceding year for SBCorp (consistent with SBCorp's schedule M-1) and LabCo, together with appropriate notes and reservations, prepared in accordance with GAAP.

14.4. The Annual Reports shall identify all material disparities between amounts of income, expense, credit and allowances reported on SBCorp (consistent with SBCorp's schedule M-1) and LabCo's financial statements and similar items reported on their respective U.S. Federal income tax returns.

14.5. In accordance with the provisions of section 10.01 of Rev. Proc. 91-22, the Service may request in writing that SBCorp and LabCo furnish additional facts, computations, data, or information to clarify, verify, or complete the Annual Report. Any communication between the Service and SBCorp or LabCo pursuant to this section shall not constitute an examination or the beginning of an examination of SBCorp or LabCo for purposes of section 7605(b) or any other provision of the Code unless otherwise made as part of an examination of SBCorp or LabCo's books and records under section 7605(b) or any other provision of the Code. SBCorp or LabCo will furnish the additional items to the Service within the time periods prescribed by section 13 of this Agreement, as extended for good cause.

15. Coordination with Domestic Law.

15.1. This APA shall not affect any ongoing audits or litigation (including arbitration referrals).

15.2. This Agreement shall not limit in any manner the ability of the Service to propose deficiencies in income and additions to tax concerning any taxable year of SBCorp or LabCo concerning matters other than Covered Transactions.

16. APA Examination. If the Service conducts an audit of SBCorp and/or LabCo's U.S. Federal income tax return(s) for the APA Year(s), examination of the Covered Transactions shall be made in accordance with section 10.03 of Rev. Proc. 91-22.

17. Dispute Resolution Process.

17.1. if a dispute arises between SBCorp and/or LabCo and the Service regarding the interpretation or application of either Rev. Proc. 91-22 or any provision contained in this Agreement, SBCorp and/or LabCo and the Service shall take the dispute to the Chief Counsel for an administrative hearing and determination of the Service's position using the procedures in section 10.03(3) of Rev. Proc. 91-22.

17.2. If SBCorp and/or LabCo dispute the validity or scope of a written request for records made by the Service pursuant to section 13 of this Agreement, SBCorp and/or LabCo shall, within thirty (30) days of receiving the request, send a written notice to the Service specifying the grounds supporting SBCorp and/or LabCo's position(s). If, after receipt of the notice, the Service determines that it is nonetheless entitled to the records requested under this Agreement, it shall notify SBCorp and/or LabCo that the dispute will be referred to the Chief Counsel pursuant to this section. If the Chief Counsel determines that the Service is entitled to the records, it will notify SBCorp and/or LabCo in writing on behalf of the Service and grant SBCorp and/or LabCo sixty (60) days within which to comply with the request, if SBCorp and/or LabCo fail to comply timely, that failure, if not excused by the Service, may constitute grounds or cancellation of this Agreement in accordance with section 10 of this Agreement.

17.3. Nothing contained in this Agreement shall preclude SBCorp or LabCo from availing itself of any rights they might have to litigate the Service's suspension, cancellation, or revocation of this Agreement. Nothing contained in this Agreement shall constitute an admission by the Service, or a waiver of any defense that might be available to the Service, that the validity of its suspension, cancellation or revocation of this Agreement can be adjudicated in any forum.

18. Confidentiality.

18.1. The information, data, and documents submitted by SBCorp and LabCo to the Service in connection with their APA Request contain, inter alia, (1) the name, address, and other identifying details of SBCorp and LabCo;, and (ii) trade secrets and commercial and financial information, that are confidential and privileged. The disclosure of this information, data, and documents would cause irreparable harm to SBCorp and LabCo's business if revealed to their competitors. In addition, certain information, data, and documents contained in SBCorp and LabCo's APA Request, or which may be submitted to the Service in the future, constitutes "taxpayer return information" within the meaning of section 6103 of the Code. This includes, but is not limited to, SBCorp and Labco's APA Request, all Annual Reports, requests for renewal, all other related information, data, documents, and the executed APA. Any information described in this section is subject to the restrictions on disclosure of taxpayer-related information, as provided by U.S. law. As used in this subsection, the term "Service" includes the Office of Chief Counsel, the Office of the District Director, the Office of the Assistant Commissioner (International), and all other branches or personnel within the Service having access to such materials.

18.2. Should the Service wish to disclose any of the confidential data, information, or documents submitted by or on behalf of SBCorp and LabCo in connection with any matter relating to a taxpayer or person other than SBCorp or LabCo, it shall comply with the provisions of section 6103 of the Code or obtain SBCorp or LabCo's written consent authorizing such disclosure.

18.3. In the event that any information, data, or documents contained in SBCorp and LabCo's APA Request is deemed to constitute a "written determination" or a "background file document", as defined in section 6110 of the Code, and disclosure is required, disclosure shall occur only after SBCorp and LabCo have had an opportunity to redact each document subject to disclosure and/or to exhaust all administrative and judicial remedies including, but not limited to, those authorized by section 6110 of the Code.

19. Section Captions. The section captions contained in this agreement are for convenience and reference only and shall not affect in any way the interpretation or application of this Agreement.

20. Applicable Law. This Agreement shall be governed by, and interpreted in accordance with, the U.S. statutory case law applicable to U.S. Federal taxes. If the U.S. Federal tax treatment of any matter covered by this Agreement is altered by a change in applicable law (including income tax treaties), the new law (or treaty) provision will supersede the APA to the extent it is inconsistent therewith. To the extent that the change in applicable law is material, the Parties will negotiate in good faith to revise this Agreement, in accordance with the provisions of section 10.07 of Rev. Proc. 91-22, in order to reconcile it with the new law (or treaty) provision. If the Parties do not execute a revised agreement following a material change in applicable law, the Service may, in the exercise of its discretion, cancel this Agreement as of the effective date of any applicable law changes.

21. Notice. Any notices (or notifications) required by this agreement shall be made in writing. Notices sent to the Service shall be addressed in the manner prescribed by section 10.01(2) of Rev. proc. 91-22. Notices sent to SBCorp or LabCo shall be addressed as follows: SmithKline Beecham Corporation, Attn: H.J. King, V.P. Taxes, FP 2335, One Franklin Plaza, P.O. Box 7929, Philadelphia, PA, 19101.

22. Effective Date. This Agreement shall become binding when executed by all Parties.

In witness whereof, the Parties hereto have executed this Agreement on the dates indicated below.

SMITHKLINE BEECHAM CORPORATION

By: A.J. White

Senior Vice President and General Counsel
Date: 6/18/93
SMITHKLINE BEECHAM PHARMACEUTICALS CO.

By: Donald F. Parman
Secretary
Date: 6/18/93
INTERNAL REVENUE SERVICE

By: Robert E. Culbertson
Date: 6/28/93
Associate Chief Counsel (International)

APPENDIX A

TRANSFER PRICING METHODOLOGY

The transfer pricing methodologies to be employed by SBCorp and LabCo concerning the Covered Transactions for the APA Years are as follows:

1) The transfer price for "Tagamet" manufactured and sold by LabCo to SBCorp will be based on the resale price method and the cost sharing payment under section 936(h)(5)(C)(i)(I).

2) The resale price method will be computed based on SBCorp's Net Trade Sales of "Tagamet", after the application of any cash discount (allowances) granted to customers. However, for purposes of calculating Net Trade Sales, the aforementioned cash discount is not to exceed 2% of the "Tagamet" sales to which the cash discount applies, regardless of the actual cash discount granted. for purposes of determining the transfer price of "Tagamet" the Net Trade Sales are subsequently adjusted by:


    a). 28% of Net Trade Sales as marketing commission,

    b) 5% of Net Trade Sales for the "Tagamet" trademark,

    c). 3% of Net Trade Sales for the SmithKline Beecham trade name.


Thus, the transfer price for "Tagamet" manufactured and sold by LabCo to SBCorp is 64% of Net Trade Sales.

3) The cost sharing payment under section 936(h)(5)(C)(i)(I) of the Code for "Tagamet" will be equal to the sum of:

a). The statutory cost sharing payment, which is 110% of product area research in SIC Code 283 multiplied by a fraction, the numerator of which is possession sales of the possession product and the denominator of which is total sales of all products in SIC Code 283 (i.e the statutory formula contained in section 936(h)(5)(C)(i)(1) of the Code, plus

b). 2% of Net Trade Sales as calculated under section 2 of Appendix X.

4) The transfer price for "Dyazide" manufactured and sold by LabCo to SBCorp will be based on the comparable uncontrolled price (CUP) method with appropriate adjustments.

5) The manufacture and sale of the generic version of "Dyazide" by LabCo to Rugby Darby Laboratories Inc. (E.I.N. * * *), a subsidiary of Rugby Darby Group Companies based in New York, serves as the comparable uncontrolled sale on which the CUP method is based. Rugby Darby is a distributor of generic pharmaceuticals independent of SmithKline Beecham (as defined).

6) The CUP will be calculated by using a "lag system". That is, the CUP will be an average of the price charged by LabCo to Rugby Darby for the calendar quarter ending three months prior to the beginning of the calendar quarter for which the CUP is being determined (i.e. the CUP for the quarter beginning April 1, 1993, will be determined on the basis of the average Rugby Darby purchase price of generic Dyazide during the period October 1, 1992 through December 31, 1992). The prices charged by LabCo to Rugby Darby will be disclosed in the Annual Report with an explanation and detailed description of the above mentioned "lag system".

7) The adjustments to the CUP as defined in sections 5 and 6 of Appendix A are as follows:


    a). An adjustment must be made for the difference in manufacturing and packaging costs between the generic version of "Dyazide" and branded "Dyazide". Based on the information submitted in the APA Request,

    i. the sale of each 100 capsule bottle of branded "Dyazide" to SBCorp will be adjusted by the difference in manufacturing and packaging costs between a 100 capsule bottle of the generic version of "Dyazide" and a 100 capsule bottle of branded "Dyazide";

    ii. the sale of each 1000 capsule bottle of branded "Dyazide" to SBCorp will be adjusted by the difference in manufacturing and packaging costs between a 1000 capsule bottle of the generic version of "Dyazide" and a 1000 capsule bottle of branded "Dyazide";

    iii. the sale of each 100 capsule strip of branded "Dyazide" to SBCorp will be adjusted by the difference in manufacturing and packaging costs between 100 capsule bottles of the generic version of "Dyazide" and the branded Dyazide sold in 100 capsule strips.

    It is understood that LabCo uses a standard costing method and annually calculates the difference between standard and actual costs. Any variances (that is, the difference between actual cost and standard cost) get pro-rated back to the actual cost for the APA year in the same ratio to which the total dollar amount of manufacturing variances bears to the dollar amount of standard manufacturing costs for all sizes of commercial packages of such product for the APA year). Thus, the manufacturing and packaging adjustment must ultimately be based on the actual costs of the generic and branded "Dyazide*, that is, including any variance adjustments made to the standard cost for generic and branded "Dyazide".

    b). An adjustment must be made for the longer payment terms granted to SBCorp. This adjustment will be calculated by using a "lag system", that is, a three month average of First Boston (Puerto Rico) Inc's Qualified Possession Source Investment Income (QPSII) interest rate applicable to the calendar quarter ending three months prior to the beginning of the calendar quarter for which the QPSII rate is being determined (i.e. the QPSII rate for the quarter beginning April 1, 1993, will be determined on the basis of the average QPSII rate during the period October 1, 1992 through December 31, 1992).

    c). An adjustment must be made consistent with the rebates granted by LabCo to Rugby Darby, computed as a percentage of sales.


8) The cost sharing payment with respect to Dyazide shall be the statutory cost sharing payment (110% of worldwide R&D costs in SIC Code 283 under the statutory formula contained in section 136(h)(5)(C)(i)(i)).

APPENDIX B

NON FACTUAL REPRESENTATIONS

The following matters are non-factual Representations or submissions, the use of which is limited by section 3 of the Agreement and section 9 of Rev. Proc. 91-22:

1) The following substantive provisions of the APA:


    a) That any payment In excess of the formulary amount described in section 936(h)(5)(C)(1)(I) is required to be made under the last sentence of that section in the case of "Tagamet".

    b) That any discount from Net Trade Sales is necessary or appropriate for the SBCorp trade name.


2) SBCorp and LabCo's APA request, all correspondence, drafts, and the final APA Agreement between SBCorp, LabCo and the Service and all reports required by the APA Agreement.

APPENDIX C

CRITICAL ASSUMPTIONS

SBCorp and/or LabCo shall notify the Service no later than the date for filing the Annual Report of any change in a Critical Assumption. For purposes of this Agreement, the following Critical Assumptions, as defined in section 7 of the Agreement are applicable:

1) SBCorp and LabCo's business activities shall remain substantially the same as described in SBCorp and LabCo's APA Request and there will be no material variances in the business operations of SBCorp and LabCo with respect to Covered Transactions other than due to economic conditions or valid business purposes. Further, this Agreement does not cover any sales of OTC Tagamet and/or Dyazide.

2) Rugby Darby is neither related to SmithKline Beecham (as defined) in any way other then being a customer nor has entered in any agreement with SmithKline Beecham that potentially violates U.S. anti-trust legislation regarding the price Rugby Darby pays for the generic Dyazide manufactured by LabCo.

3) At present, a taxpayer who has elected cost sharing and wishes to change to the profit split method must, pursuant to Rev. Proc. 92-68, I.R.B. 1992-35, 16, change to the profit split method by a date no later than 120 days after the date on which final regulations under Section 482 of the Code pertaining to transfers of property are issued if the taxpayer wishes to make the change without the Commissioner's consent. The change applies to all post-1986 years. To make any change to profit split after the above mentioned date, a taxpayer must obtain the Commissioner's consent. If the provisions of Rev. Proc. 92-68 are revised or replaced, then the new provisions for making a section 936(h)(5) election must be followed.

As part of a revision of this Agreement pursuant to section 1 of the Agreement or as part of a request for renewal of the Agreement pursuant to section 12 of the Agreement, SBCorp and LabCo may request, and the Service will consider, the application of profit split under section 936(h)(5)(C)(ii) of the code as part of the APA. SBCorp and LabCo must support that request with evidence of substantial changed circumstances in their business operations in either Puerto Rico or the United States (including but not limited to: the sales of a generic version of "Tagamet", whether produced by SBCorp, LabCo, or a third party; a significant change in the volume or the unit price of "Tagamet" or "Dyazide" sales ; or a material change in section 936 of the Code). If change to the profit split method is approved, the permission to change will be part of the APA.


APPENDIX D

COMPENSATING ADJUSTMENTS

The terms "Party" or "Parties" exclude the Service for purposes of this Appendix.

1) If the transfer pricing methodology actually employed by SBCorp and LabCo with respect to the Covered Transactions for an APA Year is not in accordance with this Agreement, then the appropriate Party shall make the necessary Compensating Adjustments, as defined in section 10.02 of Rev. Proc. 91-22, to the other Party to bring the actual transfer pricing results with aspect to the Covered Transactions in conformity with this Agreement.

2) A Compensating Adjustment will be deemed to accrue as of the last day of the taxable year to which it applies. Each Party shall record the payment or receipt of a Compensating Adjustment on its books for the taxable year to which it applies.

3) The taxable income and earnings and profits of each Party, as computed in accordance with this Agreement, will include any and all income arising from the Covered Transactions and will further include any Compensating Adjustment computed and due pursuant to sections 1 and 2 of this Appendix and section 10.02 of Rev. Proc. 91-22.

4) Any subsequent adjustment to a Compensating Adjustment shall be made and paid within ninety (90) days of either the date of adjustment upon examination as finally determined by the Service and agreed to by the Parties or the filing of an amended U.S. Federal income tax return by the Parties. For FYE 1991, LabCo and SBCorp will file amended returns within 90 days from the effective date of this Agreement reflecting the appropriate Compensating Adjustment for that year.

5) Parties may employ any method which they deem appropriate and which is in accordance with the principles of Rev. Proc. 65-17, 1965-1 C.B. 833, as amended, for payment of Compensating Adjustments to each other. This includes, but is not limited to, the use of checks and wire transfers. Any payment of Compensating Adjustments or any payment of subsequent Compensating Adjustments must be documented and disclosed in the Annual Report relating to the APA Year to which the payment applies pursuant to section 14 of this Agreement.

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