Glaxo, a global pharmaceutical company and the creator and distributor of widely used medications, is having difficulties with the Internal Revenue Service (IRS). The IRS claims that the company has understated its profits and underpaid its taxes for nearly a decade. Specifically, the IRS asserts that Glaxo’s U.S. subsidiary has overpaid for its purchases of drugs from its U.K. parent company, resulting in inflated costs of goods sold and lower taxable income. Glaxo contends that the high price was justified because of the valuable and extensive research efforts by the parent company. The IRS maintains that the price paid by the U.S. company should have been lower because the U.S. company’s product promotion also contributed a significant part of the value of the products.
Research and development costs are a highly significant portion of the costs of new medications. However, the allocation of these costs to specific products involves considerable judgment. Thus, the issues are not clear-cut, and prolonged litigation between the IRS and Glaxo is expected to ensue. A tax court judgment against Glaxo may result in a potentially significant tax liability and required cash payment. In addition, it may significantly affect the company’s financial statements, causing increases in tax expense, which will reduce current- and prior- year income and require financial statement restatements. This could affect the company’s profitability for years to come.
Many representatives of the company are likely to be affected by this tax dispute, including tax accountants, attorneys, and cost and financial accountants, as well as top executives. Glaxo’s dispute with the IRS and its resolution may involve difficult decisions and create ethical dilemmas for those involved in the situation.
Suppose you are a member of the tax accounting staff for Glaxo. You are responsible for supplying the IRS with extensive documentation regarding this tax issue. Your superior has instructed you to cooperate with the IRS only to the extent necessary, without volunteering any additional information. Suppose you are aware of the existence of documents that you believe could support the IRS’s case for higher taxes. You feel very loyal to your company, but you also feel a public duty. On the one hand, you are considering “dropping a hint,” but on the other hand, you are considering misfiling the documents in order to make discovery less likely.
What issues do you face?
Who will be affected by your decision?
What values and principles are likely to influence your decision?
Review the values and principles you identified in question 3 and the people or entities you identified in question
What is the most important goal in this situation?
What would you do? How are your decisions influenced by the Biblical Worldview?
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