In its second blockbuster tax settlement in the drug industry, the Internal Revenue Service said Merck & Co. Inc. would pay $2.3 billion to settle a tax dispute involving an offshore tax shelter.
In September, the IRS reached a $3.4 billion settlement with GlaxoSmithKline P.L.C., the largest in IRS history. The GlaxoSmithKline case also resolved a dispute over the use of overseas subsidiaries to reduce U.S. taxes.
Alice G. Abreu, tax professor at Temple University's law school, said the two settlements demonstrated that the IRS had been winning corporate tax-shelter cases in court. The IRS success rate "has skyrocketed," she said.
Phil West, a tax attorney with the firm Steptoe & Johnson L.L.P., of Washington, said the government had successfully argued that an overseas corporate subsidiary must have "economic substance" to obtain tax benefits. The subsidiary cannot exist solely for the purpose of lowering U.S. taxes, he said.
Merck spokesman Rich Kerins said that the company did not believe it had done anything wrong and that the settlement would not hurt 2007 earnings, because the company has taken reserves for it.
The dispute with Merck, which employs about 10,000 workers in Montgomery County, involved the use of an offshore subsidiary in tax-friendly Bermuda. A British bank also was a partner in the subsidiary.
Merck transferred the patents underlying Zocor and Mevacor, two best-selling drugs, to the Bermuda company in the early 1990s, allowing it to benefit from a lower tax rate on drug profits, according to published reports.
Kerins said yesterday that the drug company no longer used the mechanisms it referred to as "minority interest equity financing" and that the IRS settlement resolved all issues involving them from 1993 to 2006.
In its three-paragraph statement, the IRS said the settlement resolved tax disputes with Merck between 1993 and 2001. IRS tax officials would not comment beyond the release. The agency is pursuing cases against General Electric Co. and the Dow Chemical Co. for similar arrangements in the mid-1990s.
In response to a question regarding the use of tax shelters, Kerins said: "Merck stands behind the integrity of all its tax-reporting practices and is in compliance with IRS rules and regulations."
The company faced penalties and back taxes of $3.6 billion to $3.9 billion in the tax dispute, according to figures contained in the company's regulatory filings. Merck "concluded that, given the theoretical amount in disagreement, it was in the company's best interests to reach this settlement so as to remove the uncertainty and cost of potential litigation," the company said in a statement.
Merck still faces a tax investigation in Canada, which could result in the company's paying back taxes of $1.4 billion and interest of $360 million.
Merck shares rose 0.25 percent, or 11 cents, to close at $44.06 in trading yesterday on the New York Stock Exchange.