Addressing threats to health care's core values, especially those stemming from concentration and abuse of power. Advocating for accountability, integrity, transparency, honesty and ethics in leadership and governance of health care.

Friday, September 29, 2006

How Merck and other companies saved billions in taxes

This story appeared in the Wall Street Journal yesterday. It is yet another tale of companies who publically take pride in their "civic commitments to improve society" privately ducking their civic commitments to pay taxes - leaving more of that burden to the ordinary worker (and patient).

The Al Capone quote by the professor who "invented" these tax-avoidance strategies is particularly disturbing ("a good lawyer with a briefcase can steal more than ten men with machine guns"):

SOUTHAMPTON, Bermuda -- Merck & Co.'s 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 restaurant 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.

... Many of the strategies like the ones used by Merck, Dow and GE were inspired by one man. In 1988, longtime tax attorney and New York University law school professor R. Donald Turlington published an influential article in the proceedings of a tax conference. Subtitled "The Art of Tax Avoidance," the article began with a 1931 quote from the late Chicago Mafia boss Al Capone: "A good lawyer with a briefcase can steal more than ten men with machine guns."

In the article, Mr. Turlington laid out ways companies could lower their taxes by exploiting a loophole in the way income was allocated within partnerships for tax purposes. He focused on the concept of depreciation, a key tool to lowering taxes.

Mr. Turlington, now retired, says the Merck deal with Abbey was a tax-advantaged way to raise significant capital, and not simply a tax- saving measure. "In my mind the question with a deal like Merck was, and still should be, 'Can a taxpayer who decides to do something for a legitimate business reason, like raising [money], do it in a way that's tax efficient by taking advantage of a rule that the government wrote?'" He added: "Merck's obligation is to do the best it can for its shareholders. If you were going to write that Merck is under some higher social obligation to maximize its taxes, that would probably catch Merck by surprise."

With regard to Mr. Turlington's statement about corporate social obligations, I can add (as the former Director of Scientific Information Resources and The Merck Index of Chemicals, Drugs & Biologicals) that Merck's "higher social obligation" was spelled out in the corporate values it taught its employees.

Employees were advised that their actions should obey not just the letter but also the spirit of the law. As a crucial self-test, employees were admonished to consider how their actions might be perceived if they appeared in print .

Ironically certain tax-related actions, while apparently adhering to the strict letter of the law as written, have now indeed appeared in print and seem to reflect someone perhaps not entirely heeding that admonition. Another unfortunate hit to corporate and industry reputation will likely follow, with negative consequences on an industry essential to improving health.

As far as an obligation to shareholders, as a biomedical information scientist I had some crazy ideas about actually providing R&D scientists with better access to rationed computer-informatics tools essential for drug discovery, which would increase research cost slightly (i.e., decrease profit slightly) at the great risk of improving the drug pipeline.

As part of a cost-cutting initiative I was laid off in Nov. 2003 perhaps due to my odd NIH/National Library of Medicine-inspired information scientist ideas along with 4,400 others, at a time of perhaps the lowest hiring rates in decades in the U.S., at great disruption to our lives (especially those of us with gray hair on our heads). This cost-cutting was prior to the Vioxx difficulties and was due to the failure of several late-stage drug candidates ... and a weak new-drug pipeline.

That $1.5 billion could at least have been used to keep those 4,400 gainfully employed.

irony is that while Merck was avoiding taxes, they were pushing the use of statins to be paid for by the very government they were defrauding.

It will have to be decided by the courts whether these actions were or were not legal. However, the loss of confidence by the public from incidents like this may not be easily recoverable.

Executives also fail to realize the hardship under which they place people, and the effects that has on those who remain. It took me 18 months to find a new position; one of my colleagues in another dept. who was even older, with a wife with serious medical problems, was not employed after two years, as I understand it. The workers in that department felt very depressed about his situation, and clearly about their own predicament.

Corporate layoffs in industry are bad enough, but in pharma - an industry that sells itself as helping people - layoffs demoralize everyone and do not help R&D efforts.

They also in effect give everyone a raise.

I say that because the effect of mass layoffs is to make everyone else work less hard (although on the surface they may appear to be working harder, but their soul is really not into it, epsecially when they see senior executives rewarding themselves). By working less hard, the pay per unit of work done effectively rises.

This is not a 'pay raise' with positive consequences, and ostensibly capitalist executives who dismiss this with management-metaphysics ideas about "creative destruction" and other socially-disruptive garbage philosophies that ignores basic human nature are as deluded as, say, Marxists.

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