LONDON -- IBM confirmed Friday that British tax authorities are investigating its accounts amid reports that the company avoided paying taxes.
International Business Machines Corp., the world's largest computer company, refused to divulge details of the case. It said it is cooperating with authorities.The Wall Street Journal reported Friday that the inquiry stems from allegations made by a former IBM employee that the company im-properly avoided paying taxes in Britain by arranging for its British business unit to pay artificially high royalties to its U.S. parent. The paper attributed the information to people familiar with the matter.
The Board of Inland Revenue, Britain's tax collection agency, refused to comment Friday.
"IBM is currently working with the Inland Revenue on an inquiry," the company said in a statement. "This is a normal and routine procedure."
IBM added that it had no comment regarding the allegations against it or the former employee who reportedly made them, Gerard M. Churchhouse.
The Journal reported that Churchhouse, a former sales and marketing manager for IBM UK Ltd., alleged that the company avoided paying nearly $500 million in British taxes between 1991 and 1996 by increasing to 12 percent from 8 percent the royalties it paid to its parent for revenues earned in Britain.
The paper said that if the allegation is true, it would mean IBM lowered the operating profit of its British unit and thereby lowered its British taxes. It would also mean a corresponding increase in operating profit for IBM's business in the United States where IBM did not pay taxes between 1991 and 1993 because it was losing money. U.S. operations became profitable again in 1994.
Inland Revenue has been investigating IBM's financial records for about two years, the paper said.
IBM fired Churchhouse in 1995, and his allegations were part of a lawsuit he later filed against the company in New York's Supreme Court, the newspaper said. The lawsuit was dismissed earlier this year.
The Journal said Churchhouse alleged that IBM's parent ordered its British unit to boost its royalty payments in 1991.
The four-4-percentage-point increase in 1991 amounted to 160 million pounds in extra royalties that year or about $260 million at current exchange rates.
Churchhouse estimated that the total amount of royalty increases from 1991 to 1996 was as much as $1.45 billion, and that IBM avoided paying roughly $480 million over that period.