Tax

Merck Says It May Owe $5.58b in Taxes

But Merck officials believe that the company's transactions are in "full compliance with IRS rules."
Stephen TaubNovember 8, 2006

Merck & Co. said it faces as much as $5.58 billion in tax liabilities from the U.S. and Canada stemming from four disputes. The drug giant noted in a regulatory filing that it disagrees with the proposed adjustments and intends to pursue these matters through applicable Internal Revenue Service and judicial procedures.

However, Merck officials assured investors that the resolution will not have a material adverse effect on the company’s financial position or liquidity, according to a statement. The company did concede, though, that an unfavorable resolution could have a material adverse effect on its results in the quarter in which the adjustment is recorded. “Any settlement is likely to have a material adverse effect on the company’s cash flows in the quarter that such payment is made,” the statement concluded.

Recently, Merck’s Chief Executive Officer Richard Clark told the Wall Street Journal that the company was “very conservative” in its tax practices. He also told the paper he was not concerned with the potential liabilities, given Merck’s financial wherewithal, stressing: “I don’t lose any sleep over that.”

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A Merck spokesman told the paper that the company believed the transactions are in “full compliance with IRS rules” and that it plans to contest the matter.

In one dispute, the Canada Revenue Agency issued Merck a notice of reassessment containing adjustments related to certain intercompany pricing matters, which would require Merck to pay an addition $1.4 billion (U.S.) in taxes, plus $360 million in interest. The Journal pointed out that Merck has previously disclosed $2.3 billion of the $5.58 billion in potential liabilities that were disclosed in Tuesday’s filing.

The $2.3 billion is related to a partnership deal in 1993 which the paper said in a September article allowed Merck to shift taxable income to a subsidiary of a UK bank, but avoid the financial loss of shifting comparable book income.