US Pharma Investors Deserve Transparency to Understand Tax Risks

A request for pharmaceutical company Merck & Co. to publish detailed information on its tax and financial data shows that it’s time for the US to join much of the rest of the developed world in mandating public country-by-country reporting for corporations.

The New Jersey-headquartered pharmaceutical company reported nearly $20 billion in profits last year from $65 billion in global sales. Yet Merck’s domestic tax picture is that of a struggling company, with a $1.8 billion tax loss in the US for 2024.

Last month, a group of faith and pension investors asked for Merck to begin publishing country-by-country reporting information, including the company’s taxes for every jurisdiction where it does business. The proposal will be voted on at the May 27 annual shareholders meeting.

Merck is one of several pharmaceutical companies whose tax practices have been in the spotlight. The IRS is seeking $10.7 billion from Amgen Inc. over alleged profit shifting.

When the dispute became public in 2021, Amgen stock declined by 6.5%, and again by 4.3% in 2022 when further revelations came to light. Amgen is now facing a class action lawsuit from investors alleging the company’s disclosures surrounding this dispute were inadequate.

Do similar tax risks apply to Merck? We can’t be sure. But lawmakers, independent experts, and now investors, are asking questions.

Merck is one of several pharmaceutical companies that has been the subject of an ongoing US Senate Finance Committee investigation into pharmaceutical companies’ ability “to exploit foreign subsidiaries to avoid paying taxes on U.S. prescription drug sales.”

Independent experts, including economist Brad Setser of the Council on Foreign Relations and tax expert George Callas of Arnold Ventures, have delved into how the 2017 Tax Cuts and Jobs Act reforms failed to stem profit-shifting in the pharmaceutical sector.

Now, Merck’s shareholders—like others before them at Amazon.com Inc., Microsoft Corp., Cisco Systems, and other major US multinationals—are asking for more transparency around the company’s international tax practices.

The company’s flagship product—the blockbuster cancer treatment drug Keytruda—is the best-selling prescription drug in the world. Although the US is by far the single largest market for Keytruda, Merck reports a domestic loss of over $10 billion since 2016. In the rest of the world, Merck’s profits have been astronomical: almost $96 billion over the same period.

At first, it doesn’t seem to make sense. Most large foreign markets have strict price controls and other regulations, while US customers often pay significantly more for drugs. But we can begin to understand the reason for the discrepancy if we look at Merck’s tax reporting.

US tax rules have long rewarded companies that can make their domestic profits look like they were earned elsewhere, which can be done either through “on-paper” accounting gimmicks or by outsourcing production to low-tax countries such as Ireland and Singapore.

Today, multinational corporations can get up to a half-off US tax discount by doing this, and Merck is a case in point. Its offshore earnings reportedly reduced the company’s overall tax liability by more than $10 billion over the past decade.

Per Merck’s SEC filings, these savings “reflect the impacts of operations in jurisdictions with different effective tax rates than the US, particularly Ireland, the Netherlands and Switzerland, as well as Singapore and Puerto Rico.” Ireland, for example, manufactures about half of Merck’s top 20 products—including Keytruda.

Such strategies may temporarily inflate the bottom lines of companies such as Merck, but they pose stark risks for investors over the longer term. President Donald Trump appears rankled by what he perceives as Ireland’s theft of America’s pharmaceutical manufacturing base.

The US should consider joining much of the rest of the developed world in mandating public CbCR. The European Union already does so, albeit only for a limited set of jurisdictions and with numerous loopholes that are likely to create gaps in reporting.

New rules in Australia mandating even more comprehensive reporting went into effect late last year and will require multinational companies to disclose their revenues, income, tangible assets, employee count, and more for tax planning hubs such as Singapore, Switzerland, Bermuda, and Hong Kong.

Opposition to public CbCR comes from some multinational companies who make overblown claims of compliance costs and fear that disclosed information will be misinterpreted. In reality, compliance costs will be negligible since most multinational corporations already produce confidential country by country reports.

Multinational companies are also free to “tell their own story” and explain their rationale for tax arrangements. Several multinational companies, such as Shell, already disclose publicly country by country reports and report no negative impacts to their businesses.

There is no reason the US—and investors—should be left behind in the dark.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Ian Gary is executive director of the FACT Coalition.

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