UPDATE 3-Merck to pay $2.9 bln to settle U.S. tax claims

Wed Feb 14, 2007 6:11pm EST

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By Ransdell Pierson

NEW YORK Feb 14 (Reuters) - Merck & Co. Inc. (MRK.N) will pay $2.9 billion to settle three tax disputes with the U.S. Internal Revenue Service, the drugmaker said on Wednesday, but another $1.76 billion dispute with Canadian tax authorities remains unresolved.

The company later said the cash cost of the settlement will be $2.3 billion after an offsetting $200 million IRS refund and tax deductions Merck will be able to take on the substantial interest component of the settlement.

The drugmaker said it previously allocated reserves for the trio of newly resolved tax matters, and the settlement should not have a material effect on its earnings in 2007 or require related charges be taken this year.

Merck did not describe the nature of the disputes, other than to say they pertain to "minority interest equity financing" dating back to 1993.

The IRS has pursued actions against other companies for such financing arrangements, which often involve partnerships with foreign banks that can lead to lower taxes.

Merck said one of the resolved disputes, described in a regulatory filing last November, involved demands by the IRS for $2.3 billion in back taxes and interest for disallowed royalty and other expenses involving a partnership it entered into in 1993. Merck took the deductions from 1994 through 2001.

The Wall Street Journal reported in September that the matter involved a complicated arrangement by which Merck set up a subsidiary in tax-friendly Bermuda, in partnership with a British bank. The drugmaker then transferred patents involving two lucrative cholesterol drugs to the subsidiary, according to the report.

Merck later paid the subsidiary for use of the patents, a maneuver that allowed the drugmaker to slash $1.5 billion off its U.S. tax bills over the ensuing decade, the Journal said.

The settlement announced on Wednesday also resolves a dispute in which the IRS demanded $1.02 billion in back U.S. taxes and interest related to a "1995 minority interest equity financing," Merck said.

It also resolves a longstanding IRS claim for $480 million in U.S. taxes and interest relating to a minority interest equity financing entered into in 2000, Merck verified later on Wednesday.

The Whitehouse, New Jersey-based company said it continues to face claims by Canada for back taxes and interest of $1.76 billion for tax returns from 1998 through 2004. It has said it is contesting the assessment.

Merck shares closed up 11 cents at $44.06 on the New York Stock Exchange, amid moderate gains for the drug sector. (Additional reporting by Susan Kelly and Michele Gershberg)

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