What's behind Merck's fluctuating income tax expenses?

Merck's fluctuating income tax expenses can be attributed to several factors, including its tax strategy, operational efficiency, and geopolitical factors influencing its tax obligations.

1. **Tax Strategy and Offshore Profits**: Merck has been under scrutiny for its tax strategy, particularly regarding the offshore profits from its blockbuster drug Keytruda. The company has been accused of shifting profits abroad to avoid paying billions in U.S. taxes. For instance, in 2021, Merck reported $22.4 billion in U.S. sales but only $1.85 billion in pretax income, with the majority of its profits recorded in low-tax jurisdictions such as Singapore, Ireland, and Switzerland. This strategy has led to an effective tax rate below the U.S. corporate tax rate, sparking criticism from lawmakers.
2. **Mark-to-Market Taxation**: The mark-to-market taxation of capital gains has been a topic of discussion among policymakers, aiming to generate revenue and reduce inequality by taxing capital gains annually rather than deferring them. Merck's financial dealings, including the potential mark-to-market taxation of its capital gains, could significantly impact its income tax expenses.
3. **Business Expenses and Credits**: Merck's income tax expenses are also influenced by its business expenses and credits. For example, the company's use of certain credits, such as the Earned Income Credit (EIC), can affect its taxable income and, consequently, its income tax expenses. Additionally, the company's business losses due to expenses generating tax credits, such as child tax credits and child care credits, can impact its overall tax liability.
4. **Global Operations and Tax Compliance**: As a global company with operations in various countries, Merck's tax expenses are subject to the tax laws and regulations of these jurisdictions. The company's tax governance structure, which includes separate units for different tax matters, indicates a commitment to tax compliance and risk management. However, the complexity of its global operations and the tax environment in which it operates can lead to fluctuations in income tax expenses.

In conclusion, Merck's fluctuating income tax expenses are a result of a combination of factors, including its strategic tax planning, operational efficiency, and the tax laws and regulations of the countries in which it operates. The company's effective tax rate has been below the U.S. corporate tax rate, which has raised questions about the impact of its tax strategy on income tax expenses.