Boston Scientific Ready to Fight IRS Over Taxes

A battle is brewing between Boston Scientific Corp. and the Internal Revenue Service (IRS) over a half-billion dollar tax bill.

The IRS claims the Natick, Mass.-based medical device behemoth owes the government $581 million in taxes plus interest and penalties over the inter-company transfer pricing of technology license agreements between certain divisions of its Guidant Corp. subsidiary. The IRS wants to adjust the pricing of those agreements, thereby forcing Boston Scientific to pay millions of dollars in additional taxes. The agency also is questioning financial terms of the April 2006 sale of Guidant’s vascular intervention business to Abbott Laboratories. The Abbott Park, Ill.-based healthcare conglomerate purchased the vascular intervention business for $4.1 billion and agreed to pay Boston Scientific $250 million upon U.S. Food and Drug Administration approval of Guidant’s drug-eluting stent; an additional $250 million was promised for similar approval from Japanese regulators. In addition, Abbott provided Boston Scientific with a five-year, $900 million interest-bearing loan and spent $1.4 billion to purchase about 64 million shares of BSX stock (which at the time, represented less than 5 percent of the company).

Naturally, Boston Scientific is contesting the government’s claims. The company expressed its discontent with the IRS and additional tax burden early last month, stating in a Dec. 7 U.S. Securities and Exchange Commission (SEC) filing that it does not agree with the transfer pricing methodologies applied by the IRS or its resulting assessment. “…We believe the IRS has exceeded its authority by attempting to adjust the terms of our negotiated third-party agreement with Abbott,” the SEC filing reads. “We believe that we have meritorious defenses for our tax filings, that the IRS positions with regard to these matters are inconsistent with the applicable tax laws and the existing [U.S.] Treasury regulations, and that the previously reported income tax for the years in question is appropriate.”

Boston Scientific would not be required to pay any additional taxes until the dispute is resolved. The process could take years.