Merck defends tax approach against senator’s claims of avoidance

Drugmaker Merck has defended the company’s approach to tax after a US congressional committee accused it of exploiting loopholes to avoid paying billions of dollars and blocking an inquiry into its practices.

Chief financial officer Caroline Litchfield said the company operates with the highest “ethics and integrity in absolutely everything we do” and is continuing to co-operate with the Senate finance committee’s investigation into its tax affairs.

Merck is one of several US-based multinational companies that have come under scrutiny from the committee, which is investigating how Big Pharma uses a combination of offshore subsidiaries, tax exemptions and legal loopholes to slash their tax bills.

In 2021 the Kenilworth, New Jersey-based company paid an effective tax rate of 11 per cent in 2021, almost half the US corporate tax rate of 21 per cent. Almost half of its sales were generated in the US, according to company filings.

“From a tax perspective we operate and comply with not only the words of tax law but the spirit of tax law in each and every country in which we operate,” Litchfield said in an interview. “I feel very strongly that what we do is the right thing.”

Litchfield’s comments follow blistering criticism of Merck last week from Democrat Ron Wyden, the Senate finance committee chair, who accused the company of stonewalling the committee’s investigation into the tax policies of US pharmaceutical companies.

Merck had twice declined to provide information to the committee and is choosing to keep secret how much of its profits are reported by offshore subsidiaries for tax purposes, he said.

“There appears to be a substantial discrepancy between where Merck generates prescription drug sales and where Merck books profits from those drug sales for tax purposes,” he added.

The committee is investigating how Merck structures sales of its blockbuster cancer drug Keytruda, which reached $17.2bn last year, an increase of 19.5 per cent compared with 2020. It is examining why all profits generated from sale of Keytruda — including sales made to American buyers — are taxed in jurisdictions outside the US.

“Since Merck holds the intellectual property rights to Keytruda in the Netherlands and manufactures the drug entirely in Ireland, Merck is able to avoid billions of dollars of taxes on profits from Keytruda sales in the US,” said Wyden.

Tax experts say pharma companies are among the most prodigious users of aggressive tax strategies and have in the past deployed offshore schemes with colourful names, such as the “double Irish”.

Brad Setser, an economist with the Council on Foreign Relations, a non-partisan think-tank, said multiple US pharmaceutical companies report that they earn the vast bulk of profits outside the US despite having substantial sales in the company.

“It isn’t a coincidence that they also produce some of their most important drugs outside the US, as offshore production helps create the legal basis for booking profits in jurisdictions with tax rates well below the US headline rate,” he said.

Dublin in 2020 phased out the “double Irish” loophole, which uses two Irish registered companies to channel profits through Ireland and on to tax havens like Bermuda. But experts say multinationals have continued to deploy aggressive tax practices to avoid paying US taxes.

The Senate committee alleges former president Donald Trump’s 2017 Tax Cuts and Jobs Act created additional loopholes in US tax law that encouraged Big Pharma groups to use different schemes to shift their profits offshore. It is seeking additional information from Merck and Abbott Laboratories to try to identify the loopholes and propose legislation to prevent tax avoidance.

AbbVie, which manufactures the blockbuster rheumatoid arthritis drug Humira, booked 99 per cent of 2020 sales in foreign subsidiaries even though three quarters of sales were made in the US, according to the committee’s interim report published last month.

Litchfield said Merck’s decision to hold the intellectual property for Keytruda in the Netherlands is entirely appropriate, noting that a team of Dutch scientists invented the drug.

“It’s within the ethical boundaries to have intellectual property owned where that intellectual property was discovered. That’s what the situation is with regards to Keytruda.”