Merck to Pay $2.3 Billion in Tax Case
By JESSE DRUCKER
February 15, 2007; [WSJ] Page A4
Merck & Co. will pay the federal government $2.3 billion to resolve roughly a decade of disputed back taxes, in one of the largest publicly disclosed settlements between a U.S. corporation and the Internal Revenue Service.
The agreement is the latest such high-profile settlement between the IRS and a corporate taxpayer as part of a general crackdown on tax shelters. In the fall, the IRS announced a $3.4 billion deal with GlaxoSmithKline PLC to settle a dispute over the tax treatment of transactions between the British drug maker and its U.S. subsidiary. And the government has notched court victories in the past year against General Electric Co., Black & Decker Corp. and aerospace-products maker Coltec Industries Inc. over the use of tax shelters.
The agreement between Merck and the government covers taxes, interest and some penalties, settling three separate disputes spanning from 1993 to 2006 that could have totaled at least $3.8 billion, according to Merck's filings with the Securities and Exchange Commission.
The biggest of the disputes involved a complicated transaction dating back to 1993. At the time, Merck set up a Bermuda-based subsidiary with a unit of British bank Abbey National PLC, to which it transferred two lucrative patents for its cholesterol-lowering drugs Zocor and Mevacor. Merck then paid the subsidiary to use those patents. The payment stream allowed Merck to allocate taxable income to Abbey within the partnership, while not comparably reducing the income it reported to shareholders under accounting rules. Because of differences between U.S. and United Kingdom tax laws, Abbey never had to pay taxes on most of that income either, effectively permitting it to disappear between different tax jurisdictions.
The arrangement, internally code named "Project Ryland," for a restaurant near Merck's Whitehouse Station, N.J., headquarters, was the subject of a September page-one article in The Wall Street Journal.
The settlement announced by Merck could be bad news for Dow Chemical Co., which is in litigation with the government in U.S. district court in Baton Rouge, La., over its use of a nearly identical partnership deal. There, the IRS and U.S. Department of Justice claim the company improperly lowered its taxes by roughly $130 million by shifting income to a consortium of European banks. Dow says the arrangement was legitimate financing and is suing the government to retain the money. Dow didn't return a call requesting comment.
Merck said the $2.3 billion settlement represents its expected "final net cash cost" from the pact. The agreement is actually for $2.9 billion, the company said, but $1.2 billion is interest, and therefore tax-deductible, and $200 million had already been paid to the government. Of the total settlement, $100 million represents penalties, which prompted some observers to point out that Merck will still come out ahead.
"It's a huge settlement," said David Weisbach, a tax-law professor at the University of Chicago. But the tiny portion devoted to penalties "means there remains a strong incentive to engage in shelters even if they end up not working. Without effective penalties, they might as well take risky positions."
In an interview, IRS Commissioner Mark Everson defended the agency's approach. Although he wouldn't comment on the Merck case specifically, he said: "Any credible observer would admit that we've strengthened our enforcement in the corporate arena and high-income individuals." He added: "It's not cheap to keep litigating something year after year....You could go for broke on each and every case and litigate it until the end, but that is not sound tax administration."
In a statement, Merck said it decided to settle "so as to remove the uncertainty and cost of potential litigation."
Merck previously booked reserves for the items. It said it doesn't expect the settlement to have a material impact on 2007 earnings, or to take any charges related to the settlement.
---- Sarah Rubenstein contributed to this article.
online.wsj.com |
