British-based drug company GlaxoSmithKline is battling the U.S. Internal Revenue Service over a potential $1.9 billion in back taxes, interest and penalties.

Glaxo had already detailed the dispute in its annual report in March, but the case was highlighted by The Wall Street Journal on Friday, which said the IRS was investigating a tax-savings technique employed by the company known as earnings stripping.

The practice usually involves reducing taxable profits in the U.S. by claiming excessive interest deductions on intercompany loans from units abroad.

Glaxo, the world's second-largest drugmaker, said in the annual report that in this case the dispute arose over its reclassification of an inter-company financing arrangement ... from debt to equity and its consequent recharacterisation of the amounts paid as dividends subject to withholding tax.

Glaxo is contesting the IRS argument over tax liabilities going back to 2001 and initiated actions in the U.S. tax court in August 2008.

It does not expect a court decision before 2011, assuming the matter cannot be resolved before then, it said in the annual report. Glaxo estimates the IRS claim for tax, penalties and interest for the period 2001-2003 is $864 million, with an additional potential liability for 2004-2008 of $1.059 billion.

It believes the IRS claim has no merit and that no tax adjustment is warranted.

The row is the latest in a series of disputes between Glaxo and the U.S. tax authorities. In 2006, the company agreed to pay more than $3 billion to settle a fight over so-called transfer pricing, a year before it was due to go to trial.

Transfer pricing is a practice designed to minimize U.S. taxable profits by overpaying foreign subsidiaries for product supplies.

A spokesman for the IRS said it does not comment on any personal or corporate tax matters.

(Reporting by Elinor Comlay and Ben Hirschler; editing by Christian Wiessner/Will Waterman)

Glaxosmithkline