April 15 is “Tax Day”—the day by which all Americans must file their federal income tax returns. This year, N.C. Policy Watch is using Tax Day as a means of highlighting a frequently under-reported message at this time of year: Namely, that not all Americans (and especially not all American corporations) are paying their fair share of federal taxes.
To underscore this message, we are shining a light on a trio of giant corporate tax avoiders with strong connections to North Carolina by summarizing:
- the size and scope of their businesses,
- the taxes they have avoided paying in recent years
- and the methods they use to accomplish this.
Click here to read the previous profile of Duke Energy.
Company: Merck & Co
Background and North Carolina connections:
With facilities in Wilson and Durham, Merck is a cornerstone of North Carolina’s healthcare manufacturing sector and a key player in global vaccine production and distribution. One of the world’s seven largest pharmaceutical companies, Merck employs 83,000 workers in more than 30 facilities located in 120 countries worldwide.
The pharmaceutical giant first came to North Carolina in 1983, when it established its vaccine storage and distribution facility in Wilson, N.C. In 2003, as a recipient of one of the first Job Development Investment Grants (JDIG—the state’s flagship corporate incentives program) Merck decided to locate a major vaccine manufacturing facility in Durham, which has expanded in several phases in the years since.
|One of the largest pharmaceutical companies in the world; key player in global vaccine production and distribution.|
|2012 Sales:||$14 billion|
|2012 Assets:||Total assets of the Merck Group—$28.3 billion|
|Total Profits 2008-12:||$19.6 billion|
|Profits held offshore:||$53.4 billion as of 2012 ($22.2 billion added betweem 2008 and 2012.)|
|Effective tax rate on total profits earned 2008-2012 (including those sheltered offshore:||8.6% (18.4% when sheltered profits are excluded.)|
At its 262-acre Durham campus in the Treyburn Corporate Park, Merck employs more than 750 workers in producing a range of vaccines including Varivax (needed for varicella), Proquad (needed for mumps, measles, rubella) and, in the near future, Zostavax (used for shingles). Ultimately, the Durham campus is expected to produce more than two-thirds of Merck’s annual live virus vaccine stock, accounting for over 25 million doses per year. Merck’s 225-acre facility in Wilson employs 400 workers and serves as a packaging center for many of the company’s pharmaceutical products for the U.S. and Canadian markets.
According to its annual report for 2012, Merck earned $14 billion in sales and held assets in excess of $28.3 billion.
Principal tax avoidance strategy:
Over the past several years, many multinational corporations based in the United States have raked in record profits—and stashed those profits in offshore accounts. Most of these profits were earned here in the United States, but were shifted into these foreign tax shelters expressly in order to avoid U.S. corporate income taxes. As an analysis by the non-partisan Center for Tax Justice makes clear, the corporate income tax code treats these profits as “foreign” because they reside outside the United States, and as a result, they cannot be subjected to U.S. taxes until they are repatriated.
In effect, companies like Merck that stash profits in offshore accounts are able to shelter these profits from American taxation, dramatically reducing their overall tax liability.
Although Merck is one of the five most aggressive offshore tax avoiders, they are not alone in taking advantage of this loophole. In fact, no less than 92 Fortune 500 corporations boosted their individual offshore profit holdings by at least $500 million in 2012—adding an additional total $229 billion to their offshore holdings in that year.
According to analysis conducted by the Institute for Taxation and Economic Policy, Merck reported about $19.6 billion in taxable profits to the United States government from 2008 through 2012. During this period, however, the pharmaceutical giant actually earned an additional $22.2 billion in profits that were sheltered in offshore bank accounts—effectively avoiding the corporate income tax.
By 2012, Merck had stashed a total of $53.4 billion in these offshore, tax-free accounts.
By excluding these profits from taxation, the drug company was able to significantly reduce the effective tax rate it had to pay. Thus, while Merck paid 18.4% on its non-sheltered profits between 2008 and 2012, its overall rate fell to an estimated 8.6% when all profits (sheltered and non-sheltered) are included. This represents less than a quarter of the statutory 35% federal corporate income tax rate.
Public services not provided that Merck’s taxes could have paid for:
As more and more people are aware, the recent federal decision to implement billions of dollars worth of “sequestration” cuts is beginning to take a real toll in North Carolina. For instance, sequestration is expected to slash nearly $25 million in K-12 education, likely costing an estimated 350 teachers their jobs, and reducing services for almost 38,000 children.
Obviously, however, if Merck and other large corporations had paid the statutory rate (or something close to it) in federal income taxes, many—if not all—of these painful cuts could be (and would have been) avoided.
The bottom line:
Merck is a phenomenally profitable and successful international corporation that plays an important (and lucrative) role in providing life-saving vaccines and medicines across the world. Part of being a good corporate citizen, however, involves paying the taxes that help make success possible—taxes that finance the training of a skilled workforce and the construction of cost-reducing infrastructure.
If companies like Merck are allowed to continue to offshore their profits and avoid their U.S. taxes, other American taxpayers are going to have to pick up the tab—either through higher taxes or the deterioration of the services that benefit us all and helped make Merck’s success possible.
The data in this report regarding Merck’s profits and taxes were provided to N.C. Policy Watch by the Institute on Taxation and Economic Policy and derived from an analysis of the corporation’s “10-K” filings with the Securities and Exchange Commission.