Thursday, September 28, 2006

Project Ryland - Merck's cash Bermuda Triangle?

SOUTHAMPTON, Bermuda -- Merck medications Zocor and Mevacor have been used by millions of people to help lower their cholesterol.
But Merck also used the drugs to lower something else: its U.S. tax bill.

Thirteen years ago, Merck set up a subsidiary with an address in tax-friendly Bermuda, in partnership with a British bank. Merck quietly transferred patents underlying the blockbuster drugs to the new subsidiary, according to documents and people familiar with the transaction. Merck then paid the subsidiary for use of the patents.

The arrangement in effect allowed some of the profits to disappear into a kind of Bermuda triangle between different tax jurisdictions. The setup helped Merck slash $1.5 billion off its federal tax bills over roughly the next 10 years.

Now, the complicated transaction -- never publicly disclosed -- has sparked one of the largest tax disputes ever involving a U.S. corporation.
The Internal Revenue Service is challenging the tax benefits from the arrangement, which the company code-named "Project Ryland," after a fancy restaraunt (pics) near the company's New Jersey headquarters.

Merck anticipates it will be ordered to hand over a total of $2.3 billion in back taxes, interest and penalties, according to its filings with the Securities and Exchange Commission, which give the amounts in dispute but virtually no other details.

Merck says it did nothing wrong and that the deal was simply a way of raising financing for its 1993 acquisition of a pharmacy-benefits management firm, Medco Containment Services Inc.

"We believe the partnership transaction is in full compliance with IRS rules and regulations and we vigorously disagree with the proposed IRS adjustments," says Merck spokesman Raymond Kerins, who declines to discuss details of the dispute.

More at the WSJ

1 comment:

CL Psych said...

Who wants to bet that, outside of legal fees, Merck walks away clean or pays just a nominal fine? All those campaign contributions have to be worth something, right?