Merck to Pay IRS $2.3B in Tax Disputes

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merckMerck & Co., mired in multibillion litigation over its withdrawn painkiller Vioxx, has eliminated another legal headache, resolving several tax disputes with the Internal Revenue Service by agreeing to a $2.3 billion settlement.

In announcing the agreement Wednesday, the Whitehouse Station, N.J.-based company said the settlement resolves all outstanding tax disputes with the IRS, covering the years 1993 through 2006. Merck had faced potential taxes, interest and penalties totaling as much as $3.8 billion, but the agreement apparently reduced that amount.

Neither Merck nor the IRS would discuss the reduction.

The IRS said in its own statement that the settlement resolves all issues in dispute for the years 1993-2001.

'It can't be seen as anything but positive' for Merck to resolve the case, said analyst Steve Brozak of WBB Securities.

Merck still has a $1.76 billion tax dispute with Canadian authorities and has filed an appeal with the Canada Revenue Agency that is expected to be reviewed this year, spokesman Raymond Kerins said.

Merck had disclosed both tax cases in November in a routine filing with the U.S. Securities and Exchange Commission. Merck said the Canadian dispute 'related to certain intercompany pricing matters.'

Tax and accounting analyst Robert Willens of Lehman Brothers said in such cases drugmakers generally sell medicines at low cost to subsidiaries in countries with lower tax rates, which can then mark up the price and keep more profit after taxes.

'This is a constant tug-of-war between the IRS' and companies, Willens said.

He said Merck paid a very high percentage of the amount of taxes in dispute _ about 60 percent _ far higher than the one-third or so that is typical.

'That would suggest Merck must have felt it had a fairly weak case,' Willens said.

Merck said the IRS settlement is not expected to materially affect its profit for 2007 because it had previously reserved money to cover those costs. Kerins declined to say how much was reserved and when that was done.

Wall Street showed little reaction to the news. Shares rose 11 cents to close at $44.06 on the New York Stock Exchange.

Brozak said the stock price likely did not shift much because the tax dispute is not as significant as other problems Merck is juggling. Those include looming generic competition to key drugs, a limited number of new ones coming to market and more than 27,400 personal injury lawsuits alleging harm from Vioxx _ the former blockbuster arthritis pill it pulled from the market in September 2004 after finding in increased risk of heart attack and stroke.

'How many things can you focus on at one given time?' Brozak said.

Merck said the IRS settlement was in the company's best interests given the uncertainty and cost of potential litigation.

The settlement relates to a subsidiary Merck set up in 1993 in tax-friendly Bermuda with a third-party investor as a way to raise capital.

Merck's November SEC filing states the IRS had notified the company it was proposing adjustments to tax returns related to the partnership; IRS was planning to disallow deductions for royalties and other expenses and to designate as taxable income money Merck reported as loans from foreign subsidiaries, among other things.

In its statement, the IRS called the Merck settlement one of its largest in recent years.

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

source - AP