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GSK dodged millions in China drug tax scam: state media

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[May 19, 2014]  SHANGHAI (Reuters) A Chinese state-run newspaper has accused British drugmaker GlaxoSmithKline Plc of evading at least 100 million yuan ($16.04 million) in taxes, adding to pressure on the firm which is already struggling with graft charges against executives.

Chinese police on Wednesday said they had charged the former boss of GSK's China business and other colleagues, in the biggest corruption scandal to hit a foreign company there since four Rio Tinto executives were jailed in 2009.

Although the corruption charges target executives rather than the company itself, the mounting allegations made by Chinese media suggest the drugmaker is far from safe.

The Legal Daily newspaper, run by the ruling Chinese Communist Party's Political and Legal Committee, reported on Friday that GSK intentionally imported Lamivudine, used to treat HIV as well as hepatitis, at an elevated cost.

Along with using tax loopholes for charitable donations, this helped GSK "avoid over 100 million yuan in import value-added tax and corporate income tax," the report said.

The report followed less-detailed allegations by state news agency Xinhua saying GSK used transfer pricing to artificially reduce its profits and tax bill in China.

GSK officials in Shanghai and London declined to comment, despite repeated phone, text and email requests from Reuters since Friday. The drugmaker said on Wednesday that the graft charges were "shameful" and that it hoped to reach a resolution to enable it to continue serving Chinese consumers.

Chinese police charged Mark Reilly, the former British boss of GSK's China business, and other colleagues with corruption last week, after a 10-month probe found the firm made billions of yuan from elaborate schemes to bribe doctors and hospitals.

The allegations against GSK have damaged its reputation and led to an overhaul of operations in what is set to become the world's second-biggest pharmaceutical market behind the United States within three years, according to consultancy IMS Health.

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The Legal Daily report also said that GSK had avoided import taxes by donating some of the imported drug to support state-backed treatment of the disease, adding GSK could have donated cheaper drugs that it produced at a plant in Suzhou instead.

"The most serious thing is that through this sham charity, GSK blocked the Chinese government making its own generic drugs to treat AIDS, so that it could attain a monopoly over the hepatitis drug market," the Legal Daily said.

Xinhua also reported earlier that GSK had spent tens of millions of yuan to bribe hospitals to use Lamivudine after it lost patent protection in 2010.

Legal sources and one source with direct knowledge of the GSK investigation have said that Chinese authorities may be looking to charge the company itself, which could put the drugmakers license to operate in China at risk.

($1 = 6.2334 Chinese Yuan)

(Reporting by Adam Jourdan in SHANGHAI, Sui-Lee Wee and Xiaoyi Shao in BEIJING; Editing by Michael Urquhart)

[ 2014 Thomson Reuters. All rights reserved.]

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