With tax day right around the corner in the U.S., Merck & Co. is the latest Big Pharma to find itself in the crosshairs of a congressional tax probe.
Sen. Ron Wyden, the chairman of the Senate Finance Committee, on Monday wrote to Merck CEO Robert Davis asking how the company managed to pay a tax rate of just 11% last year. As Sen. Wyden notes, Merck's "legal domicile" is in the U.S., and that's where most of the company's R&D activities take place.
But despite recording $22.4 billion in U.S. sales last year, Merck reported just $1.85 billion in pretax income, the senator pointed out. That compared with international pretax income of more than $12 billion from about $27 billion in international sales.
"This substantial discrepancy ... appears to be the result of Merck’s use of subsidiaries in several well-known low-or-zero tax jurisdictions," Sen. Wyden wrote to the Merck CEO.
In his letter, the senator explained that "offshore profits" in places like Singapore, Ireland and Switzerland are taxed at "special rates." For example, Switzerland awarded a "tax holiday" for the company's new legal entity that's effective through 2030, according to Merck's annual SEC filing (page 132).
In the filing, the company said its tax strategy yielded a "favorable impact on the effective tax rate compared with the U.S. statutory rate of 21%."
"That Merck located more than 85 percent of its profits abroad implies that the current U.S. international tax system created by the 2017 Republican Tax Law failed to stem Merck’s offshoring and instead seems to encourage it," the senator added.
While Merck may be a beneficiary of President Donald Trump's 2017 tax plan, the company was also an active supporter, Sen. Wyden notes. The company spent "significant resources supporting the bill," Sen. Wyden wrote, citing lobbying disclosures. And Merck's former CEO Kenneth Frazier "repeatedly pressed decision-makers on taxes," the senator said.
As part of his probe into the tax law, Sen. Wyden is asking Merck for a country-by-country breakdown of its earnings, margins, headcount and taxes paid around the globe from 2019 to 2021. He also wants a "detailed explanation" about how Merck's effective tax rate sank to 11% last year from 22.9% in 2020 and 21.8% in 2019.
"The law’s flawed design enables large multinational corporations that primarily operate in the United States to structure their operations in a way that allows them to pay a tax rate that is a fraction of that paid by hard-working American families," the senator wrote.
A Merck spokesperson didn't immediately respond to a request for comment.
It's not the first time Sen. Wyden has dug into a pharma company's taxes. Earlier this year, he wrote to Bristol Myers Squibb's CEO Giovanni Caforio inquiring about a New York Times report that BMS used offshore subsidiaries to avoid more than $1 billion in taxes.
In 2012, the company set up a "sophisticated tax avoidance strategy, where it shifted intellectual property rights for several prescription drugs to a newly created offshore subsidiary to shift untaxed gains and generate amortization deductions," the senator wrote in January. BMS' tax rate fell from about 25% in 2010 and 2011 to -6.9% in 2012, Sen. Wyden added.
Those allegations aren't unique to BMS. AbbVie has faced similar questions of hosting intellectual property in tax havens, and in 2007 Merck agreed to pay the IRS $2.3 billion to settle a tax dispute covering the years 1993 to 2001.