In an 8-K form filed with the U.S. Securities and Exchange Commission (SEC) June 16, Synopsys said the proposed adjustment primarily relates to transfer pricing transactions between Synopsys and a foreign subsidiary. Synopsys said the IRS notified the company of the net tax deficiency for fiscal 2000 and 2001 on June 8.

A spokesperson for Synopsys said Monday (June 20) that the IRS is claiming Synopsys owes additional taxes as the result of a transaction between the company and its Irish subsidiary, Synopsys International Ltd. (Dublin).

"We strongly believe the proposed IRS adjustments and resulting proposed deficiency are inconsistent with applicable tax laws, and that we thus have meritorious defenses to these proposals," Synopsys said.

Tax disputes between the IRS and multi-national high-tech companies pertaining to transactions with foreign entities are not unusual. Synopsys' rival Cadence Design Systems Inc. (San Jose, Calif.) was told by the IRS in 2003 that the company owes an additional $143 million in taxes for fiscal years 1997 though 1999. This disputed claim involves transfer pricing arrangements with a foreign subsidiary.

In Cadence's most recent quarterly filing with the SEC, filed May 10, Cadence said it believes that the proposed IRS adjustments are inconsistent with the applicable tax laws and that the company is "challenging these proposed adjustments vigorously."

In 2001, the IRS claimed that programmable logic manufacturer Xilinx Inc. (San Jose) owed additional taxes based on the calculation of royalty payments to that company's Irish subsidiary. In April 2004, Xilinx won a stipulation from the IRS agreeing with the company's original calculations, effectively vindicating the company and removing the threat of further tax collection based on these payments.

Synopsys said it would continue to challenge its proposed adjustments, but believes it will most likely need to make some additional payments to the IRS to resolve the matter. The company said it would file protest with the IRS, which would then refer the matter to its appeals office. Resolution of this matter could take considerable time, possibly several years, Synopsys said.

Synopsys' stock price dropped from $18.31 per share to $17.44 June 17 on word of the possible additional taxes. The stock closed at $17.49 Monday.