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Singapore, Feb 09, 2010: A recent report by PricewaterhouseCoopers (PwC) entitled Pharma 2020: Taxing times ahead - Which path will you take? revealed that the global financial crisis, government pressure, changing market dynamics and rapidly evolving healthcare reforms are likely to drive up the effective tax rate for the pharmaceutical and life sciences industry.
The industry’s response to these trends, including diminishing reliance on the blockbuster drug model, will make tax planning more complicated and challenging for tax executives working for pharmaceutical and life sciences companies.
Based on a poll comprising 35 senior tax executives from pharmaceutical, biotech and medical device companies conducted recently by PwC:
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Six in 10 tax leaders agree that an increase in the effective tax rate for the pharmaceutical and life sciences industry is inevitable.
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63 percent of the poll participants agreed that the cost of increased taxes on their organizations might eventually be passed onto consumers unless they find ways to operate more efficiently and transform their approach to R&D and, sales and marketing.
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62 percent of tax executives polled said they are looking to maximize tax credits and other incentives for research and development.
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All executives polled said they believe that the demand for tax specialists will grow substantially as tax issues for the industry become more complex.
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More than half of the respondents said they are now being consulted early on by senior management in strategic business decisions, and thus have influence over the direction of the company. Still, 34 percent said they are consulted late in the game, and 9 percent of tax leaders said they are informed after the fact about strategic business decisions that have tax implications for the organization.
Mr Abhijit Ghosh, Pharmaceutical and Life Sciences leader at PwC-Singapore said, “To deliver value to shareholders and society, pharmaceutical and life science companies must continue to make strategic decisions on how they will drive innovation and profitability. Tax executives of these companies are expected to play an important role in such decision making processes. Tax planning and effective management of tax affairs will be critical considerations in deciding where to locate intellectual property, manufacturing and service delivery as these companies pursue their long run business plans to grow, buy, merge or sell.”
Economic and government pressure: crackdown on tax havens
The global recession has made tax authorities around the world hungry for new revenue sources to overcome growing budget deficits and potential new costs associated with healthcare reform initiatives. Governments are very concerned and are therefore focused on the use of tax havens that allow multinationals to move profits offshore. They will continue to scrutinize transfer pricing practices to limit abuse of intra-company transfers of expenses or profits. Economic substance of offshore operations will become increasingly more important.
According to PwC, identification of uncooperative nations may become more common, and corporations that continue to use tax havens could face financial penalties and reputational damage.
Healthcare market trends: focus on outcomes and personalized medicine
Payers want better value for the money they spend on healthcare and are focusing their efforts on increasing delivery of successful treatments. In response, drug and device makers are shifting from a purely product-centric focus to a service model aimed at improved patient outcomes and prevention or cure, versus ongoing treatment, of disease. As such, with other participants they are packaging traditional products with holistic services including diagnostic, wellness and compliance monitoring.
In addition, with the advancement of personalized medicine and tailored approaches to prevention and care, pharmaceutical companies are developing more complex and fragile specialized therapies, many of which need to be manufactured in closer proximity to patients.
By increasing service delivery and locating manufacturing closer to patients, or the end market, both the supply chain and IP will be geographically dispersed. Pharmaceutical and life sciences companies could not only face new and higher taxes as a service provider, but they will have less ability to allocate profits to lower tax rate locations.
Furthermore, a decision to locate service providers in end markets could create permanent establishments in multiple tax jurisdictions, increasing the risk of double taxation disputes involving international or intra-company allocations around pricing, royalty rates, interest, management fees, business expense and gross revenue.
Complex business combinations
The need to fill the shrinking drug pipeline has fueled resurgence in mergers and acquisitions (M&A), in-licensing arrangements and formation of partnerships and joint ventures - a trend PwC expects to continue. Each of these strategies comes with significant tax implications, depending on how a company accounts for acquisition-related items, structures royalty payments, and shares profit and loss among different legal entities and locations.
Competition to attract pharma and life science investments
Pharmaceutical and life sciences companies are interested in locating IP development in areas that offer economic and tax incentives and to expand their presence in emerging markets that promise growth potential. International competition is intensifying to attract new investment by pharmaceutical and life sciences companies, particularly from emerging markets, such as China.
According to PwC, this trend may further drive profit growth to the East, but companies will need to balance increased income with higher tax rates and potential price controls.
Mr Ghosh concludes, “As pharmaceutical and life science companies continue to expand their footprints in Asia, they need to carefully evaluate the tax efficient opportunities that Asian countries, such as Singapore, provide while developing tax plans consistent with their new business models.”
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