Merck to Pay $2.3B in IRS Dispute

WASHINGTON - Merck & Co. Inc. agreed Wednesday to pay $2.3 billion to resolve several tax disputes, the Internal Revenue Service said.

The drug company's payment includes taxes, interest and penalties stemming from the disputes, which cover the tax years 1993-2001, the IRS said. The IRS said the disputes arose in part from Merck's use of minority equity interest financing transactions.

"This settlement resolves all of the issues that were in dispute," the Whitehouse Station, N.J. company said in a statement.

The company said the settlement is not expected to have an effect on its 2007 earnings because it previously reserved funds to cover the payment.

Merck disclosed in November that it faced liabilities from tax disputes in both the U.S. and Canada. It cited a total of $5.58 billion in potential liabilities at the time, including $3.82 billion in taxes, interest and penalties payable to the IRS, according to a company filing with the Securities and Exchange Commission.

An IRS spokesman declined to comment on the roughly $1.5 billion discrepancy between the November amount cited by the company and the settlement announced Wednesday. Merck spokesman Ray Kerins also declined to comment.

Merck said in a statement that the IRS settlement was in the company's best interests given the uncertainty and cost of potential litigation. The Canadian claim remains unresolved.

The Merck settlement relates to a partnership deal set up in 1993. The Wall Street Journal reported in September on how Merck, in partnership with a British bank, set up a subsidiary with an address in tax-friendly Bermuda.

Merck then transferred patents on some of its blockbuster drugs to that subsidiary, later paying it for use of those patents, the newspaper reported. The deal allowed the company to shave its tax bill to the tune of $1.5 billion over roughly a decade, according to the Journal report.

Merck's November SEC filings refer only to a 1993 partnership transaction in discussing its then-potential liabilities to the IRS.

The Canada Revenue Agency still seeks U.S. $1.76 billion in taxes and interest from Merck "related to certain intercompany pricing matters," according the company's November SEC filings. The company has said the Canadian agency's claims are without merit.

Another drug company, GlaxoSmithKline PLC, agreed in September to pay the IRS $3.4 billion in what was the largest tax settlement ever.