Merck & Co., Inc.MRK
Merck & Co., Inc. Income Taxes Disclosure
Taxes on Income
As discussed in Note 2, the Company prospectively adopted a new accounting standard effective for 2025 reporting that requires disaggregation of information in the effective income tax rate reconciliation and income taxes paid disclosures.
A reconciliation between the effective income tax rate and the U.S. statutory rate (in accordance with the new guidance) for 2025 is as follows:
| 2025 | |||||||||||
| Amount | Tax Rate | ||||||||||
| U.S. statutory rate applied to income before taxes | $ | 4,424 | 21.0 | % | |||||||
| Differential arising from: | |||||||||||
State and local income taxes, net of federal benefit (1) | 12 | 0.1 | |||||||||
| Foreign tax effects: | |||||||||||
| Switzerland | |||||||||||
| Tax rate differential between Switzerland and the U.S. | (1,428) | (6.8) | |||||||||
| Withholding taxes | 284 | 1.3 | |||||||||
Other (2) | 59 | 0.3 | |||||||||
| Netherlands | |||||||||||
| Tax rate differential between Netherlands and the U.S. | 409 | 1.9 | |||||||||
| Innovation box | (1,042) | (4.9) | |||||||||
| Other | (66) | (0.3) | |||||||||
| Other foreign jurisdictions | 308 | 1.5 | |||||||||
| Effect of cross-border tax laws: | |||||||||||
| Net controlled foreign corporation tested income | 3,759 | 17.8 | |||||||||
| Foreign-derived deduction-eligible income | (31) | (0.1) | |||||||||
| Subpart F | 227 | 1.1 | |||||||||
| Tax credits: | |||||||||||
| Foreign tax credits | (4,190) | (19.9) | |||||||||
| Research and development tax credits | (260) | (1.2) | |||||||||
| Valuation allowances | 76 | 0.4 | |||||||||
| Nontaxable or nondeductible items | (78) | (0.4) | |||||||||
| Changes in unrecognized tax benefits | 341 | 1.5 | |||||||||
| $ | 2,804 | 13.3 | % | ||||||||
(1) State and local tax expense was not material in 2025.
(2) Includes the impact of Cantonal tax holiday and OECD Pillar 2.
A reconciliation between the effective income tax rate and the U.S. statutory rate (as previously reported in accordance with guidance prior to the adoption of the new accounting standard) for 2024 and 2023 is as follows:
| 2024 | 2023 | |||||||||||||||||||||||||
| Amount | Tax Rate | Amount | Tax Rate | |||||||||||||||||||||||
U.S. statutory rate applied to income before taxes | $ | 4,186 | 21.0 | % | $ | 397 | 21.0 | % | ||||||||||||||||||
| Differential arising from: | ||||||||||||||||||||||||||
| Foreign earnings | (1,301) | (6.5) | (941) | (49.8) | ||||||||||||||||||||||
Tax settlements and statute lapses | (557) | (2.8) | — | — | ||||||||||||||||||||||
| R&D tax credit | (202) | (1.0) | (214) | (11.3) | ||||||||||||||||||||||
Inventory donations | (71) | (0.4) | (65) | (3.5) | ||||||||||||||||||||||
| State taxes | (39) | (0.2) | (117) | (6.2) | ||||||||||||||||||||||
Charges for certain research and development asset acquisitions | 554 | 2.8 | 253 | 13.4 | ||||||||||||||||||||||
| Valuation allowances | 54 | 0.3 | 70 | 3.7 | ||||||||||||||||||||||
| Restructuring | 52 | 0.3 | 41 | 2.2 | ||||||||||||||||||||||
| GILTI and the foreign-derived intangible income deduction | 29 | 0.1 | (80) | (4.3) | ||||||||||||||||||||||
Acquisition-related costs, including amortization | 18 | 0.1 | 42 | 2.2 | ||||||||||||||||||||||
Acquisition of Prometheus | — | — | 2,139 | 113.3 | ||||||||||||||||||||||
| Other | 80 | 0.4 | (13) | (0.7) | ||||||||||||||||||||||
| $ | 2,803 | 14.1 | % | $ | 1,512 | 80.0 | % | |||||||||||||||||||
Where applicable, the impact of changes in uncertain tax positions is reflected in the reconciling items above.
In 2025, the Company made the final installment payment due related to the transition tax liability under the Tax Cuts and Jobs Act (TCJA) of 2017 of $1.2 billion. As of December 31, 2025, the Company has $702 million of foreign tax credits included in Other Assets that Merck expects to be applied upon the completion of the Internal Revenue Service’s (IRS) examination of the Company’s tax returns for the 2017 and 2018 federal tax years. As a result of the transition tax under the TCJA, the Company is no longer indefinitely reinvested with respect to its undistributed earnings from foreign subsidiaries and has provided a deferred tax liability for foreign withholding taxes that would apply. The Company remains indefinitely reinvested with respect to its financial statement basis in excess of tax basis of its foreign subsidiaries. A determination of the net deferred tax liability with respect to this basis difference is not practicable.
The foreign earnings tax rate differentials in the tax rate reconciliations above primarily reflect the impacts of operations in jurisdictions with different effective tax rates than the U.S., particularly Switzerland, the Netherlands and Ireland, as well as Singapore and Puerto Rico which operate under tax incentive grants (which begin to expire in 2025), thereby yielding a favorable impact on the effective tax rate compared with the U.S. statutory rate of 21%. The Company has an additional Cantonal tax holiday in Switzerland that provides for a tax rate reduction and is effective through 2032. The Company’s income that is subject to tax incentive grants and the Cantonal tax holiday in Switzerland is subject to the global minimum tax provision of the Organization for Economic Cooperation and Development (OECD) Pillar 2, effective in 2024.
Income before taxes consisted of:
| Years Ended December 31 | 2025 | 2024 | 2023 | ||||||||||||||
| Domestic | $ | (4,948) | $ | (1,849) | $ | (15,622) | |||||||||||
| Foreign | 26,015 | 21,785 | 17,511 | ||||||||||||||
| $ | 21,067 | $ | 19,936 | $ | 1,889 | ||||||||||||
Taxes on income consisted of:
| Years Ended December 31 | 2025 | 2024 | 2023 | ||||||||||||||
| Current provision | |||||||||||||||||
| Federal | $ | 499 | $ | 944 | $ | 928 | |||||||||||
| Foreign | 4,072 | 3,123 | 2,435 | ||||||||||||||
| State | (96) | (15) | 48 | ||||||||||||||
| 4,475 | 4,052 | 3,411 | |||||||||||||||
| Deferred provision | |||||||||||||||||
| Federal | (1,585) | (1,475) | (1,559) | ||||||||||||||
| Foreign | (83) | 212 | (233) | ||||||||||||||
| State | (3) | 14 | (107) | ||||||||||||||
| (1,671) | (1,249) | (1,899) | |||||||||||||||
| $ | 2,804 | $ | 2,803 | $ | 1,512 | ||||||||||||
Deferred income taxes at December 31 consisted of:
| 2025 | 2024 | ||||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||
| Product intangibles and licenses | $ | 140 | $ | 3,272 | $ | 71 | $ | 978 | |||||||||||||||
| R&D capitalization | 4,134 | — | 3,062 | — | |||||||||||||||||||
| Inventory related | 72 | 451 | 84 | 413 | |||||||||||||||||||
| Accelerated depreciation | — | 594 | — | 645 | |||||||||||||||||||
Undistributed foreign earnings | 119 | 338 | 275 | 371 | |||||||||||||||||||
| Equity investments | — | 155 | — | 90 | |||||||||||||||||||
| Pensions and other postretirement benefits | 117 | 623 | 224 | 400 | |||||||||||||||||||
| Compensation related | 382 | — | 400 | — | |||||||||||||||||||
| Unrecognized tax benefits | 160 | — | 152 | — | |||||||||||||||||||
| Net operating losses and other tax credit carryforwards | 1,197 | — | 910 | — | |||||||||||||||||||
| Other | 1,236 | 134 | 802 | 159 | |||||||||||||||||||
| Subtotal | 7,557 | 5,567 | 5,980 | 3,056 | |||||||||||||||||||
| Valuation allowance | (824) | (710) | |||||||||||||||||||||
| Total deferred taxes | $ | 6,733 | $ | 5,567 | $ | 5,270 | $ | 3,056 | |||||||||||||||
| Net deferred income taxes | $ | 1,166 | $ | 2,214 | |||||||||||||||||||
| Recognized as: | |||||||||||||||||||||||
| Other Assets | $ | 2,605 | $ | 3,601 | |||||||||||||||||||
| Deferred Income Taxes | $ | 1,439 | $ | 1,387 | |||||||||||||||||||
The Company has net operating loss (NOL) carryforwards in several jurisdictions. As of December 31, 2025, $384 million of deferred tax assets on NOL carryforwards relate to foreign jurisdictions. Valuation allowances of $248 million have been established on these foreign NOL carryforwards and other foreign deferred tax assets. In addition, the Company has $813 million of deferred tax assets relating to various U.S. tax credit carryforwards and NOL carryforwards. Valuation allowances of $576 million have been established on these U.S. tax credit carryforwards and NOL carryforwards.
Income taxes paid in 2025 (presented in accordance with the new guidance) consisted of:
Year Ended December 31 | 2025 | ||||
Domestic - federal (1) | $ | 1,559 | |||
Domestic - state and local | 24 | ||||
Switzerland | 2,115 | ||||
Netherlands | 1,576 | ||||
Other foreign | 812 | ||||
| $ | 6,086 | ||||
(1) Includes TCJA transition tax payments.
Income taxes paid in 2024 and 2023 consisted of:
| Years Ended December 31 | 2024 | 2023 | |||||||||
Domestic (1) | $ | 974 | $ | 2,258 | |||||||
| Foreign | 2,954 | 2,080 | |||||||||
| $ | 3,928 | $ | 4,338 | ||||||||
(1) Includes TCJA transition tax payments.
Prepaid income taxes included in Other current assets were $5.7 billion and $3.9 billion at December 31, 2025 and 2024, respectively. Tax benefits relating to stock option exercises were $7 million in 2025, $26 million in 2024 and $12 million in 2023.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| 2025 | 2024 | 2023 | |||||||||||||||
| Balance January 1 | $ | 2,261 | $ | 2,384 | $ | 1,835 | |||||||||||
| Additions related to current year positions | 396 | 421 | 553 | ||||||||||||||
| Additions related to prior year positions | 59 | 35 | 91 | ||||||||||||||
Reductions for tax positions of prior years | (94) | (33) | (20) | ||||||||||||||
Settlements | (28) | (18) | (23) | ||||||||||||||
Lapse of statute of limitations (1) | (64) | (528) | (52) | ||||||||||||||
| Balance December 31 | $ | 2,530 | $ | 2,261 | $ | 2,384 | |||||||||||
(1) Amount in 2024 reflects a reduction of $451 million resulting from the expiration of the statute of limitations related to the 2019 and 2020 federal tax return years.
If the Company were to recognize the unrecognized tax benefits of $2.5 billion at December 31, 2025, the income tax provision would reflect a favorable net impact of $2.5 billion.
Interest and penalties associated with uncertain tax positions amounted to $106 million in 2025, $51 million in 2024 and $131 million in 2023. These amounts reflect the beneficial impacts of various tax settlements. Liabilities for accrued interest and penalties were $546 million and $437 million as of December 31, 2025 and 2024, respectively.
The IRS is currently conducting examinations of the Company’s tax returns for the years 2017 and 2018, including the one-time transition tax enacted under the Tax Cuts and Jobs Act of 2017 (TCJA). In April 2025, Merck received Notices of Proposed Adjustment (NOPAs) that would increase the amount of the one-time transition tax on certain undistributed earnings of foreign subsidiaries by approximately $1.3 billion. In addition, the NOPAs included penalties of approximately $260 million. These amounts are exclusive of any interest that may be due. The Company disagrees with the proposed adjustments and will vigorously contest the NOPAs through all available administrative and, if necessary, judicial proceedings. It may take a number of years to reach resolution of this matter. If the Company is ultimately unsuccessful in defending its position, the impact could be material to its financial statements. In 2024, the Company recorded a benefit of $519 million due to a reduction in reserves for unrecognized income tax benefits resulting from the expiration in 2024 of the statute of limitations for assessments related to the 2019 and 2020 federal tax return years. The IRS is also currently conducting examinations of the Company’s tax returns for the years 2021 and 2022. In addition, various state and foreign tax examinations are in progress and for these jurisdictions, the Company’s income tax returns are open for examination for the period 2011 through 2025.
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Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 24, 2026 | Showing above |
| 2017 | Feb 27, 2018 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.