Merck & Co has signed an agreement with the USA’s Internal Revenue Service to settle a tax dispute, which will cost the New Jersey-headquartered drugs giant some $2.3 billion.

The company says that this deal “essentially brings to a close” the examination by the IRS into Merck's tax returns from 1993 to 2001 and noted that the $2.3 billion figure represents its expected "final net cash cost" from the deal, after tax deductions and penalties. However, the IRS' examination of years subsequent to 2001 remains open.

Merck noted that it had previously booked reserves for the items, and therefore does not expect the settlement to have a material impact on 2007 earnings. The firm concluded by saying that “given the theoretical amount in disagreement,” it was in its best interests to reach this settlement“ so as to remove the uncertainty and cost of potential litigation” and said the agreement “was reached as a result of the cooperation and reasonableness of the IRS and the company.”

The IRS said the “resolution is one of the largest achieved in recent years by the Service and a taxpayer through the examination process" and that among the significant issues resolved were three that resulted from “Merck’s use of minority equity interest financing transactions.”

The settlement would appear to be a good one for Merck, especially as it said last November that the IRS was seeking $3.8 billion, a figure the company disputed. However it is still in dispute with Revenue Canada over around $1.8 billion in taxes dating from 1998.

The settlement comes at a time when tax authorities have been seen to be taking a lingering look at drugmakers’ returns. Last September, GlaxoSmithKline agreed to settle its own tax dispute with the IRS, with a final net cost to the firm of about $3.1 billion.