American pharmaceutical giant Merck & Co. for years held offshore accounts in Bermuda to hold patents for two of its drugs, and then used the royalties from these patents as tax deductions in the United States.
On Wednesday, the company agreed to pay $2.3 billion to the Internal Revenue Service, settling a three-year tax evasion dispute.
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The settlement is the second-largest ever for the IRS. The first? British pharmaceutical company GlaxoSmithKline settling for $3.4 billion.
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The Merck settlement was significantly less than the $3.8 billion the IRS was seeking, but it avoids a lengthy tax fraud lawsuit.
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The tax shelter Merck set up in the Bermudas for its subsidiary company meant the company was essentially deducting money used to pay itself.
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The drugs involved were Zocor and Mevacor, both extremely popular and profitable drugs for cholesterol.
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Merck reported $22.6 billion in sales for 2006, and said it does not expect its bottom line to be affected by the settlement.
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Merck & Co. is an American company with German origins – Merck came from Germany, but was seized by the United States and forcibly split from its parent company at the end of World War I.
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“Generally, a settlement is safer for both sides than rolling the dice,” Martin G. Laffer, a certified public accountant, told the L.A. Times newspaper. Laffer often testifies in tax fraud cases.
