GlaxoSmithKline’s US operation has agreed to pay around $3.4 billion including interest to settle a long-running tussle with the USA’s Internal Revenue Service.

This is the largest payment ever made to the IRS to settle a dispute, and will also see the drugmaker abandon a $1.8 billion claim to overpaid taxes.

GSK had attracted the attention of the IRS for allegedly booking some of its US profits in the UK, which has a lower corporate tax rate, between 1989 and 2005, a procedure known as ‘transfer pricing’. A court case relating to the 1989-2000 period had been due to go to court in February 2007, with a second lawsuit covering the 2001-2005 period following after.

"GSK was confident of the strength of its position, but in view of the size of the potential financial exposure, as well as the continued level of resource being applied to the case, GSK concluded that it was in the best interests of its shareholders to reach this settlement, thereby removing the costs and uncertainty of future litigation," the company said.

The group had already set aside a $4.3 billion provision to cover the settlement, and said the net cost to the company would be around $3.1 billion.

Analyst Mike Ward of Nomura Securities said on balance the development was positive for GSK, as it removed an element of uncertainty for the company and the settlement was relatively easy for GSK to absorb, with little impact on earnings.