February 22, 2007

Merck has settled at least one outstanding tax dispute with the IRS for $2.3 billion, the firm said last week.

The agreement "essentially brings to a close the IRS' examination of the company for the period 1993-2001," the firm said. The settlement includes federal tax, net interest after federal tax deductions and penalties.

The firm concluded that "given the theoretical amount in disagreement," it was in its best interest to reach the settlement "so as to remove the uncertainty and cost of potential litigation." The IRS called the settlement "one of the largest achieved in recent years by the service and a taxpayer through the examination process."

The agreement also led to the resolution of three "significant issues" that resulted from Merck's use of minority equity interest financing transactions, the agency said.

The $2.3 billion settlement figure appears to be $1.5 billion short of what the IRS originally sought, according to reports. Both the firm and the agency indicated the settlement was negotiated. The settlement is not expected to have any material impact on Merck's 2007 earnings, the firm said.

The settlement is only one of several IRS disputes the company faces, one of which relates to a partnership transaction from 1993 that allowed Merck to shift taxable income to a UK bank without experiencing the financial loss of shifting comparable book income.

In a November 2006 filing, Merck also revealed it is involved in a separate tax dispute with the Canadian Revenue Agency (CRA). The CRA's claim for $1.76 billion is related to "intercompany pricing matters," the filing said.