Merck Facing US$5.5 Billion In Back Taxes

by Leroy Baker, Tax-News.com, New York

09 November 2006

Merck and Co., the pharmaceutical firm, has disclosed that it is facing additional tax liabilities totalling $5.58 billion in relation to disputes with the US and Canadian tax authorities.

In a quarterly statement filed with the Securities and Exchange Commission, Merck revealed that it disputes the tax adjustments and plans to oppose them through the correct administrative and legal channels.

In September 2006, the US Internal Revenue Service issued a number of deficiency notices following audits of the company's tax returns from 1993 to 1996 and 1996 through 2001. One notice proposed an adjustment with respect to a partnership transaction entered into in 1993. The notice also disallowed certain royalty and other deductions on tax returns from 1994 through 2001. Merck said that if the IRS prevails for tax due in 1993, the company will have to pay $142 million in back tax, interest and penalties. For the years 1994 to 2001, its tax bill will increase by $1.15 billion plus interest of about $700 million.

The IRS also issued a notice with respect to a 1995 minority interest equity financing, and disputed a capital loss which would increase the tax due for 1995 to 1998 by $330 million plus interest of $150 million. In addition, the IRS proposed the recharacterisation of a loan from a foreign subsidiary to the company as a taxable distribution. This would result in a back tax bill of another $330 million, plus interest of $210 million.

The IRS also disputed another minority interest equity financing in 2000 and proposed including as income certain other loans made by a foreign subsidiary.

In its statement, Merck said that it "disagrees with the proposed adjustments and intends to pursue these matters through applicable IRS and judicial procedures, as appropriate".

If made to pay the back taxes, Merck said that it does not expect them to have a material effect on its financial position, although it warned that they could have a negative effect on its results.

Merck's Canadian tax returns for the 1998 through 2004 are also being examined by the Canadian Revenue Agency (CRA), which last month issued a notice of reassessment containing adjustments related to transfer pricing issues which could result in additional tax of US$1.4 billion, plus interest of US$360 million.

Under Canadian rules, half of this amount may have to be paid on deposit, and the company warned that this could have a material effect on its cash flows in the quarter in which the payment is made,

However, Merck said that it believes the Canadian claim to be "without merit" and stated that it intends to contest the decision through the CRA's appeals process and the courts.

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