SEC Company Response from GSK (GSK) — Sep 1, 2005

GSK plc
Date: Sept. 1, 2005 · CIK: 0001131399 · Accession: 0000903423-05-000666

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Referenced dates: July 22, 2005

Date

September 1, 2005

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CORRESP

Company

GSK plc

Letter

Division of Corporation Finance Securities and Exchange Commission United States Re: GlaxoSmithKline PLC Annual Report on Form 20-F for the Fiscal Year Ended December 31, 2004 (File No. 1-15170)

Dear Mr. Rosenberg:

By letter dated July 22, 2005, the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) provided certain comments on the Annual Report on Form 20-F for the fiscal year ended December 31, 2004 (File No. 1-15170) (the “2004 Annual Report”) filed by GlaxoSmithKline PLC (the “Company”) with the Commission on March 8, 2005. This letter contains the Company’s responses to those comments.

For convenience, we have reproduced the Staff’s comments and provided responses immediately below them.

Operating and Financial Review and Prospects

Taxation, page 68

1. Please tell us the amount of the provision you have made with regards to the $7.6 billion claim for additional taxes (tax plus interest) asserted by the US IRS for the years 1989-2000 and why you believe your provision is appropriate under UK and US GAAP. Also, tell us the amount of provision you have made with regards to open assessments for 2001 to date.

Disclosure of Specific Amounts Provided

As described in the 2004 Annual Report (see, e.g., Note 12, p. 106), the Company’s ultimate liability in respect of the $7.6 billion claim for additional taxes and related interest ($4.6 billion in tax plus an estimated $3.0 billion in related interest) asserted by the Internal Revenue Service (the “IRS”) for the years 1989 through 2000, as well as open tax assessments for

the years from 2001 to date, is dependent upon the outcome of litigation proceedings and negotiations with the IRS, the Inland Revenue and other relevant taxation authorities. Moreover, as the 2004 Annual Report also describes, the IRS and the Inland Revenue have made competing and contradictory claims in respect of certain of these matters. Despite pursuing settlement both with the IRS alone and through joint discussions with it and the Inland Revenue, however, the Company has to date been unable to resolve the matters. As the 2004 Annual Report indicates, and as further described below, the Company believes that it uses the best advice in determining its transfer pricing methodology and continues to believe it has made adequate provision for the liabilities likely to arise from open tax assessments. Nonetheless, a wide divergence of views remains between the Company and the relevant tax authorities. Accordingly, the Company respectfully submits that disclosure of the amounts of the specific provisions made in respect of the $7.6 billion claim and the open assessments would compromise its negotiating position, including with respect to matters to be addressed at a trial provisionally scheduled for October 2006 (see Note 12, p. 106 of the Annual Report).

The Company also notes that, in addition to fully describing the foregoing matters in its 2004 Annual Report, as well as providing relevant updates in its periodic reports and press releases, it discloses its aggregate taxation creditors (see Note 22, p. 110 of the 2004 Annual Report), which reflects the Company’s ongoing assessment of its exposure in respect of tax matters. (In addition, in the legal and other disputes section of its critical accounting policies disclosure in future Annual Reports, the Company will refer specifically to this description and to its disclosure relating to taxation creditors, and will include appropriate cross-references to where they may be found.)

The Company is aware of the Staff’s concerns regarding disclosure relating to loss contingencies, including its recently articulated views on SFAS No. 5, “Accounting for Contingencies,” as expressed in the March 4, 2005 “Current Accounting and Disclosure Issues in the Division of Corporation Finance.” The Staff noted the importance of balancing “concerns regarding confidentiality with the need for the registrant’s investors, analysts, and regulators to gain a clear understanding of the registrant’s liquidity, as well as results of operations and financial position . . . .” The Company believes that it has achieved an appropriate balance and that its disclosure is adequate for investors to understand the scope of its potential losses. In particular, in light of its substantial current assets (June 30, 2005: £12.7 billion), strong liquidity position and investment-grade credit rating, as well as its access to additional resources, the Company believes that the ultimate resolution of the tax matters will not cause significant liquidity concerns.

Appropriateness of the Amounts Provided

In determining the level of provision required for the additional taxes claimed for the years 1989 through 2000, as well as for the years from 2001 to date, the Company has considered the requirements of U.K. GAAP and U.S. GAAP. In particular, in order to ensure that appropriate and sustainable provision has been established based on what the Company believes is the most likely resolution of the matters, the Company has taken the following steps:

Under U.K. GAAP, the Company has adhered to paragraph 36 of FRS 12, “Provisions, Contingent Liabilities and Contingent Assets,” which states: “The amount recognized as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date.”

Under U.S. GAAP, the Company has adhered to paragraph 8 of SFAS No. 5, “Accounting for Contingencies,” which provides for the making of a provision when it is “probable” that “a liability has been incurred at the date of the financial statements” and “[t]he amount of the loss can be reasonably estimated.” In conjunction with this requirement, the Company has applied the guidance at paragraph 3 of FIN No. 14, “Reasonable Estimation of the Amount of a Loss,” which states: “When some amount within the range (of loss) appears at the time to be a better estimate than any other amount within the range, that amount should be accrued . . . .”

In complying with the foregoing U.K. GAAP and U.S. GAAP requirements, the Company has:

(i)

evaluated the particular facts of the claims and the application of relevant tax laws to those facts;

(ii)

assessed comparatively the outcomes of similar cases; and

(iii)

worked extensively with two sets of highly-regarded external tax counsel, as well as its internal tax experts.

On this basis, the Company believes it has made accruals in respect of the tax matters in accordance with the requirements of U.K. GAAP and U.S. GAAP.

The Company continues to evaluate the tax matters, particularly as the case in respect of the claims for 1989 through 2000 moves toward trial in October 2006. When any new relevant information emerges, the Company reassesses the level and adequacy of the amounts provided with its internal and external tax advisors.

Critical Accounting Policies, page 69

Turnover

2. We believe that your disclosure related to estimates of items that reduce gross revenue such as product returns, chargebacks, customer rebates and other discounts and allowances could be improved. Please provide us the following information in disclosure-type format to help us evaluate the adequacy of your disclosure:

A roll forward of the liability for each estimate for each period presented showing the following:

Beginning balance,

Current provision related to sales made in current period,

Current provision related to sales made in prior periods,

Actual returns or credits in current period related to sales made in current period,

Actual returns or credits in current period related to sales made in prior periods, and

Ending balance.

A discussion of the reason for fluctuations for each type of reduction of gross revenue (i.e., product returns, chargebacks, customer rebates and other discounts and allowances) including the effect that changes in your estimates of these items had on your revenues and operations. If material changes in estimate have been recognized fully explain the new information that became available and why that information could not be anticipated at the date the original estimate was made. Your current discussion of estimating discounts and allowances does not indicate if material changes in estimate have been recognized in any of the periods presented.

The following table sets forth the roll forward of the liability of the U.S. pharmaceuticals business for each estimate for the periods presented in the 2004 Annual Report.

U.S. Govt.

Managed

& State

Charge-

Care

Cash

Customer

Total

Programs

backs

& GPOs

Discounts

Returns

Other

(£ millions)

Balance at December 31, 2002

Provisions made for sales made in the

current period

2,508

Release of provision for sales made in prior

periods*

(93)

(38)

(53)

(2)

Payments, credits and returns†

(2,462)

(560)

(840)

(589)

(226)

(117)

(130)

Exchange

(90)

(29)

(5)

(36)

(2)

(13)

(5)

Balance at December 31, 2003

Provisions made for sales made in the

current period

2,461

Release of provision for sales made in prior

periods*

(51)

(19)

(5)

(15)

(12)

Payments, credits and returns†

(2,286)

(592)

(722)

(551)

(207)

(93)

(121)

Exchange

(58)

(23)

(4)

(23)

(8)

Balance at December 31, 2004

______

Prior period adjustments have been presented for each category in this table in order to provide a detailed analysis of this line item in response to the Staff’s comment. By contrast, the table reconciling gross turnover to net turnover in the response to Question 3 below, as well as the similar table in the 2004 Annual Report (p. 69), include these adjustments on an aggregate basis in the line item entitled “Other.”

†

A split of the payments, credits and returns figures between those relating to sales made in the current period and those made in prior periods is not included in the table, as it is not readily available from the records maintained by the Company.

As the analysis indicates, and as is further highlighted in the table reconciling gross turnover to net turnover in the response to Question 3 below, the estimates did not fluctuate significantly during the periods presented, save that the provision for rebates relating to U.S. government and state programs increased. This increase resulted from an increase in the number of U.S. government and state programs covered by the Company, as well as an increase in the volume of sales within existing programs.

In each year, the small release of provision related to sales made in the prior year arose from the availability of additional utilization data that enabled the Company to make further refinements to its estimation processes. These adjustments amounted to less than 1% of gross turnover in each of the years presented, which the Company considers insignificant in the context of the estimation required to calculate the overall provision in respect of U.S. pharmaceutical turnover.

The Company considers revenue recognition a very important area and expends considerable effort to ensure that its revenue recognition policies and practices are kept current, and that revenue is only recognized if and when it is appropriate to do so. Although the Company has presented the foregoing data in response to the Staff’s comment, it is of the view that significantly increasing the level of detail in its critical accounting policy disclosure would not provide material information to readers. Nonetheless, should any issues arise in the future where increased disclosure in this area would be appropriate, the Company of course will include such disclosure in its Annual Reports.

3. Please provide us with the reconciliation from gross turnover to net turnover for 2003 and 2002 in disclosure-type format to help us evaluate the adequacy of your disclosure. Explain any changes in a category as a percentage of gross turnover from year to year.

The following table sets forth the reconciliation of gross turnover to net turnover for the U.S. pharmaceuticals business for 2002 through 2004.

(£ millions)

Gross turnover

10,835

11,825

12,286

U.S. government and state programs

Chargebacks

Managed care and group purchasing

organization rebates

Cash discounts

Customer returns

Other (including prior period

adjustments)*

(12)

Total deductions

2,410

2,415

2,489

Net turnover

8,425

9,410

9,797

___

As noted in the response to Question 2 above, the adjustments relating to prior years amounted to less than 1% of gross turnover in each of the years presented, which the Company considers insignificant in the context of the estimation required to calculate the overall provision in respect of U.S. pharmaceutical turnover.

As the table shows, chargebacks, rebates, discounts, returns and allowances, as a percentage of gross turnover, generally were unchanged for the periods under review. The only change relates to U.S. government and state programs in 2004, which increased principally due to the coverage of additional government programs during the year, as well as an increase in the volume of sales within existing programs.

Pensions and Post-Retirement Benefits

4. Provide us your justification for not including pension expense under US GAAP as a critical accounting policy/estimate. We note US GAAP pension expense increased by 91% from 2002 to 2003 mainly due to expected return on plan assets and amortization of net actuarial loss. We further note the £1.9 billion unrecognized net actuarial loss as of December 31, 2004. Critical Accounting Policies should discuss the factors and assumptions related to the estimate and the reasonably likely effects that changes could have on the financial statements.

The Company notes the Staff’s comment and acknowledges that the critical accounting policy disclosure on pension and post-retirement benefits in the 2004 Annual Report does not explicitly refer to U.S. GAAP. However, the significant factors and assumptions already described in the critical accounting policy disclosure (including those set out in Note 35, pp. 129-135, to which the policy cross-refers) are the same ones that apply under U.S. GAAP. The Company agrees that it would be useful to clarify this point and intends to do so in future Annual Reports.

The Company also notes the Staff’s comment that critical accounting policy disclosure should address the sensitivity of the financial statements to changes in assumptions used. In accordance with U.S. GAAP, the Company already has included in the 2004 Annual Report an analysis of the sensitivity of post-retirement benefits to future healthcare inflation (see Note 37, p. 149). In addition, in future Annual Reports, the Company will discuss other factors and assumptions related to the pension expense estimate and the reasonably likely effects that changes in the estimate could have on the financial statements.

Financial Position and Resources, page 71

The statement of cash flows presents material increases in 2004 and 2003 in trade and other debtors. From Note 21 it appears that trade debtors i

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Writer’s Direct Dial: +44 207 614 2237

E-Mail: ssperber@cgsh.com

September 1, 2005

BY EDGAR

Mr. Jim B. Rosenberg

Senior Assistant Chief Accountant

Division of Corporation Finance

Securities and Exchange Commission

Washington, D.C. 20549

United States

Re:

GlaxoSmithKline PLC Annual Report on Form 20-F

for the Fiscal Year Ended December 31, 2004 (File No. 1-15170)

Dear Mr. Rosenberg:

By letter dated July 22, 2005, the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) provided certain comments on the Annual Report on Form
20-F for the fiscal year ended December 31, 2004 (File
No. 1-15170) (the “2004 Annual Report”) filed by GlaxoSmithKline PLC (the “Company”) with the Commission on March 8, 2005. This letter contains the Company’s responses to those comments.

For convenience, we have reproduced the Staff’s comments and provided responses immediately below them.

Operating and Financial Review and Prospects

Taxation, page 68

1. Please tell us the amount of the provision you have made with regards to the $7.6 billion claim for additional taxes (tax plus interest) asserted by the US IRS for the years 1989-2000 and why you believe your
provision is appropriate under UK and US GAAP. Also, tell us the amount of provision you have made with regards to open assessments for 2001 to date.

Disclosure of Specific Amounts Provided

As described in the 2004 Annual Report (see, e.g., Note 12, p. 106), the Company’s ultimate liability in respect of the $7.6 billion claim for additional taxes and related interest ($4.6 billion in tax plus an
estimated $3.0 billion in related interest) asserted by the Internal Revenue Service (the “IRS”) for the years 1989 through 2000, as well as open tax assessments for

the years from 2001 to date, is dependent upon the outcome of litigation proceedings and negotiations with the IRS, the Inland Revenue and other relevant taxation
authorities. Moreover, as the 2004 Annual Report also describes, the IRS and the Inland Revenue have made competing and contradictory claims in respect of certain of these matters. Despite pursuing settlement both with the IRS alone and through
joint discussions with it and the Inland Revenue, however, the Company has to date been unable to resolve the matters. As the 2004 Annual Report indicates, and as further described below, the Company believes that it uses the best advice in
determining its transfer pricing methodology and continues to believe it has made adequate provision for the liabilities likely to arise from open tax assessments. Nonetheless, a wide divergence of views remains between the Company and the relevant
tax authorities. Accordingly, the Company respectfully submits that disclosure of the amounts of the specific provisions made in respect of the $7.6 billion claim and the open assessments would compromise its negotiating position, including with
respect to matters to be addressed at a trial provisionally scheduled for October 2006 (see Note 12, p. 106 of the Annual Report).

The Company also notes that, in addition to fully describing the foregoing matters in its 2004 Annual Report, as well as providing relevant updates in its periodic reports and press releases, it discloses its aggregate
taxation creditors (see Note 22, p. 110 of the 2004 Annual Report), which reflects the Company’s ongoing assessment of its exposure in respect of tax matters. (In addition, in the legal and other disputes section of its critical accounting
policies disclosure in future Annual Reports, the Company will refer specifically to this description and to its disclosure relating to taxation creditors, and will include appropriate cross-references to where they may be found.)

The Company is aware of the Staff’s concerns regarding disclosure relating to loss contingencies, including its recently articulated views on SFAS No. 5, “Accounting for Contingencies,” as expressed in the
March 4, 2005 “Current Accounting and Disclosure Issues in the Division of Corporation Finance.” The Staff noted the importance of balancing “concerns regarding confidentiality with the need for the registrant’s investors,
analysts, and regulators to gain a clear understanding of the registrant’s liquidity, as well as results of operations and financial position . . . .” The Company believes that it has achieved an appropriate balance and that its disclosure is adequate for investors to understand the scope of its potential losses. In particular, in light of its substantial current
assets (June 30, 2005: £12.7 billion), strong liquidity position and investment-grade credit rating, as well as its access to additional resources, the Company believes that the ultimate resolution of the tax matters will not cause significant
liquidity concerns.

Appropriateness of the Amounts Provided

In determining the level of provision required for the additional taxes claimed for the years 1989 through 2000, as well as for the years from 2001 to date, the Company has considered the requirements of U.K. GAAP and U.S.
GAAP. In particular, in order to ensure that appropriate and sustainable provision has been established based on what the Company believes is the most likely resolution of the matters, the Company has taken the following steps:

Under U.S. GAAP, the Company has adhered to paragraph 8 of SFAS No. 5, “Accounting for Contingencies,” which provides for the making of a provision when it is “probable” that “a liability has been incurred at the date of the financial statements” and “[t]he amount of the loss can be reasonably estimated.” In conjunction with this requirement, the Company has applied the guidance at paragraph 3 of FIN No. 14, “Reasonable Estimation of the Amount of a
Loss,” which states: “When some amount within the range (of loss) appears at the time to be a better estimate than any other amount within the range, that amount should be
accrued . . . .”

In complying with the foregoing U.K. GAAP and U.S. GAAP requirements, the Company has:

(i)

evaluated the particular facts of the claims and the application of relevant tax laws to those facts;

(ii)

assessed comparatively the outcomes of similar cases; and

(iii)

worked extensively with two sets of highly-regarded external tax counsel, as well as its internal tax experts.

On this basis, the Company believes it has made accruals in respect of the tax matters in accordance with the requirements of U.K. GAAP and U.S. GAAP.

The Company continues to evaluate the tax matters, particularly as the case in respect of the claims for 1989 through 2000 moves toward trial in October 2006. When any new relevant information emerges, the Company
reassesses the level and adequacy of the amounts provided with its internal and external tax advisors.

Critical Accounting Policies, page 69

Turnover

2. We believe that your disclosure related to estimates of items that reduce gross revenue such as product returns, chargebacks, customer rebates and other discounts
and allowances could be improved. Please provide us the following information in disclosure-type format to help us evaluate the adequacy of your disclosure:

A roll forward of the liability for each estimate for each period presented showing the following:

Beginning balance,

Current provision related to sales made in current period,

Current provision related to sales made in prior periods,

Actual returns or credits in current period related to sales made in current period,

Actual returns or credits in current period related to sales made in prior periods, and

Ending balance.

A discussion of the reason for fluctuations for each type of reduction of gross revenue (i.e., product returns, chargebacks, customer rebates and other discounts and allowances) including the effect that changes in your
estimates of these items had on your revenues and operations. If material changes in estimate have been recognized fully explain the new information that became available and why that information could not be anticipated at the date the original estimate was made. Your current discussion of estimating discounts and allowances does not indicate if material changes in estimate have been recognized in any of the
periods presented.

The following table sets forth the roll forward of the liability of the U.S. pharmaceuticals business for each estimate for the periods presented in the 2004 Annual Report.

U.S. Govt.

Managed

& State

Charge-

Care

Cash

Customer

Total

Programs

backs

& GPOs

Discounts

Returns

Other

(£ millions)

Balance at December 31, 2002

927

261

422

156

Provisions made for sales made in the

current period

2,508

628

851

567

226

150

Release of provision for sales made in prior

periods*

(93)

(38)

(53)

(2)

Payments, credits and returns†

(2,462)

(560)

(840)

(589)

(226)

(117)

(130)

Exchange

(90)

(29)

(5)

(36)

(2)

(13)

(5)

Balance at December 31, 2003

790

262

311

112

Provisions made for sales made in the

current period

2,461

734

732

575

208

126

Release of provision for sales made in prior

periods*

(51)

(19)

(5)

(15)

(12)

Payments, credits and returns†

(2,286)

(592)

(722)

(551)

(207)

(93)

(121)

Exchange

(58)

(23)

(4)

(23)

(8)

Balance at December 31, 2004

856

362

297

______

†

As the analysis indicates, and as is further highlighted in the table reconciling gross turnover to net turnover in the response to Question 3 below, the estimates did not fluctuate significantly during the periods
presented, save that the provision for rebates relating to U.S. government and state programs increased. This increase resulted from an increase in the number of U.S. government and state programs covered by the Company, as well as an increase in
the volume of sales within existing programs.

In each year, the small release of provision related to sales made in the prior year arose from the availability of additional utilization data that enabled the Company to make further refinements to its estimation
processes. These adjustments amounted to less than 1% of gross turnover in each of the years presented, which the Company considers insignificant in the context of the estimation required to calculate the overall provision in respect of U.S.
pharmaceutical turnover.

The Company considers revenue recognition a very important area and expends considerable effort to ensure that its revenue recognition policies and practices are kept current, and that revenue is only recognized if and when
it is appropriate to do so. Although the Company has presented the foregoing data in response to the Staff’s comment, it is of the view that significantly increasing the level of detail in its critical accounting policy disclosure would not
provide material information to readers. Nonetheless, should any issues arise in the future where increased disclosure in this area would be appropriate, the Company of course will include such disclosure in its Annual Reports.

The following table sets forth the reconciliation of gross turnover to net turnover for the U.S. pharmaceuticals business for 2002 through 2004.

2004

2003

2002

(£ millions)

Gross turnover

10,835

100

11,825

100

12,286

100

U.S. government and state programs

734

628

642

Chargebacks

732

851

884

Managed care and group purchasing

organization rebates

575

567

609

Cash discounts

208

226

235

Customer returns

131

Other (including prior period

adjustments)*

(12)

Total deductions

2,410

2,415

2,489

Net turnover

8,425

9,410

9,797

___

As noted in the response to Question 2 above, the adjustments relating to prior years amounted to less than 1% of gross turnover in each of the years presented, which the Company considers insignificant in the context of
the estimation required to calculate the overall provision in respect of U.S. pharmaceutical turnover.

As the table shows, chargebacks, rebates, discounts, returns and allowances, as a percentage of gross turnover, generally were unchanged for the periods under review. The only change relates to U.S. government and state
programs in 2004, which increased principally due to the coverage of additional government programs during the year, as well as an increase in the volume of sales within existing programs.

Pensions and Post-Retirement Benefits

4. Provide us your justification for not including pension expense under US GAAP as a critical accounting policy/estimate. We note US GAAP pension expense increased by 91% from 2002 to 2003 mainly due to expected return
on plan assets and amortization of net actuarial loss. We further note the £1.9 billion unrecognized net actuarial loss as of December 31, 2004. Critical Accounting Policies should discuss the factors and assumptions related to the estimate
and the reasonably likely effects that changes could have on the financial statements.

The Company notes the Staff’s comment and acknowledges that the critical accounting policy disclosure on pension and post-retirement benefits in the 2004 Annual Report does not explicitly refer to U.S. GAAP. However,
the significant factors and assumptions already described in the critical accounting policy disclosure (including those set out in Note 35, pp. 129-135, to which the policy cross-refers) are the same ones that apply under U.S. GAAP. The Company
agrees that it would be useful to clarify this point and intends to do so in future Annual Reports.

The Company also notes the Staff’s comment that critical accounting policy disclosure should address the sensitivity of the financial statements to changes in assumptions used. In accordance with U.S. GAAP, the Company
already has included in the 2004 Annual Report an analysis of the sensitivity of post-retirement benefits to future healthcare inflation (see Note 37, p. 149). In addition, in future Annual Reports, the Company will discuss other factors and
assumptions related to the pension expense estimate and the reasonably likely effects that changes in the estimate could have on the financial statements.

Financial Position and Resources, page 71

The statement of cash flows presents material increases in 2004 and 2003 in trade and other debtors. From Note 21 it appears that trade debtors i

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