Pharma 2020: Tax prospects. Which road should I choose?

Taxation issues will play a more prominent role in assessing the value of companies and determining their business strategy.

The global economic crisis, government pressure and changing market dynamics have a significant impact on an industry undergoing major changes, including rapid reforms in the field of healthcare. All these factors can most likely lead to an increase in the effective tax rate for pharmaceutical and biomedical companies. This conclusion was reached by PricewaterhouseCoopers (PwC) experts in the review "Pharma 2020: Tax Prospects. Which road to choose?" (Pharma 2020: Taxing times ahead – Which path will you take?).

The document (the fifth of the PwC reviews on the topic "Pharma 2020") examines the approaches by which companies respond to changes in the taxation situation and the consequences of these changes affecting the activities of companies. On the PwC website, you can download the full text of the report and all reviews of the Pharma 2020 series.

The retaliatory measures taken by companies in the industry, including the gradual abandonment of the model in which the rate is placed on so-called blockbuster drugs (the revenue from which for the manufacturer exceeds $ 1 billion), will lead to the fact that tax planning will become more complex and will require additional efforts on the part of the heads of tax departments of pharmaceutical companies and the medical and biological sector.

Recently, PwC conducted a survey of 35 heads of tax departments of pharmaceutical, biotech and medical equipment companies. Below are some of the survey results.

• About 60% of the heads of tax departments who participated in the survey agreed that an increase in the effective tax rate for pharmaceutical and biomedical sector companies is inevitable.
• 63% of the survey participants agreed that in the end, the additional costs of their companies caused by an increase in the tax rate will fall on the shoulders of consumers if companies do not find ways to improve operational efficiency and fail to change their approach to R&D, sales and marketing.
• 62% of respondents said that they want to make the most of tax and other benefits in the field of research and development.
• All respondents noted that they expect a significant increase in demand for specialists in the field of taxation, as taxation issues in the industry are becoming more complex.
• More than half of the respondents said that the top management of their companies now consults with them on strategic decisions before making these decisions, and that in this way they influence the management of the company. Nevertheless, 34% of respondents said that they are asked for advice too late, and 9% of respondents noted that they receive information after a decision with tax implications for the company has been made.

Alina Lavrentieva, Partner, Head of Practice for working with pharmaceutical companies, PricewaterhouseCoopers in Russia, comments on the situation: "In order to be able to continue to benefit stakeholders and society, pharmaceutical and biomedical companies must make a strategic decision on how they will contribute to innovation and increase profitability, while the heads of tax departments of companies must be fully involved in making such decisions along with the heads of other departments. Tax planning will be given increased rather than secondary attention when preparing a long-term business plan for business expansion, as well as a plan for acquisitions, mergers or sales. Tax planning will become one of the fundamentally important factors taken into account when deciding on the location of intellectual property objects, production and the place of provision of services."

The PwC review also examines the market factors that are driving the industry's tax practices to become increasingly complex. These factors are presented below.

The impact of the economy and pressure from the state: a blow to tax havensDue to the global recession, tax authorities around the world began to look for new sources of revenue, trying to cover the growing budget deficit and possible new costs of health care reforms.

The governments of a number of countries, very concerned about the current situation, have paid close attention to the tax havens that international companies use to withdraw profits abroad. Representatives of government agencies will continue to monitor the practice of transfer pricing in order to limit the illegal movement of costs and profits within international groups. More and more attention will be paid to the economic essence of foreign operations. According to PwC forecasts, the authorities will be more active in identifying tax haven countries and fining companies that, risking their reputation, will not stop using them.

Healthcare Market Trends: Result orientation and personalized medicinePayers want to receive better services and products for their money, which they spend on healthcare, and are interested in improving the effectiveness of treatment.

As a response, manufacturers of medicines and medical equipment are abandoning the product-oriented model and switching to a service model that is focused on improving the patient's condition, prevention or complete cure of the disease, and not on continuous supportive treatment, as before. Therefore, together with other market participants, they combine traditional products with comprehensive services, including diagnostics, maintaining a good physical condition of the patient and monitoring the compliance of drugs with certain requirements. In addition, with the development of personalized medicine and an individual approach to prevention and patient monitoring, pharmaceutical companies are developing more complex treatment methods, many of which will require the placement of production in close proximity to the patient.

Improving the quality of services and moving production closer to patients, that is, to the end user, will lead to the fact that the supply chain and intellectual property objects will be even further geographically dispersed. As service providers, pharmaceutical and biomedical companies may not only face higher taxes, but will also have fewer opportunities to place profits in countries with a lower tax rate. Moreover, if companies locate service providers in their end markets, permanent representative offices will be established for tax purposes in a variety of tax jurisdictions, which increases the risk of tax disputes over double taxation. These disputes will relate to the distribution of costs at the international or intra-group level, royalty rates, interest, distribution of management costs, as well as business expenses and gross revenue.

Complex business combinationsThe need to increase the number of medicines being developed has led to a sharp increase in the number of mergers and acquisitions, partnership agreements on the production, promotion and sale of drugs (in-licensing), as well as the formation of other partnerships and joint ventures.

According to PwC forecasts, this trend will continue in the future. Each of these strategies entails significant tax consequences depending on how the company accounts for acquired assets and acquisition-related expenses, structures royalties and distributes profits and losses between different legal entities and regions.

Competition for investments in pharmaceutical and biomedical companiesPharmaceutical and biomedical companies seek to develop intellectual property in regions where there are economic and tax benefits, as well as expand their presence in emerging markets that offer opportunities for growth.

There is increasing international competition for investment between these companies, especially those operating in emerging markets, such as China. According to PwC forecasts, this trend may further contribute to the relocation of profit generation centers to the East, but companies will have to take into account that high incomes may be associated with higher tax rates and possible control over pricing.

Alina Lavrentieva notes: "In order to manage effective tax rates, pharmaceutical and biomedical companies will have to bring tax planning in line with their new business model and ensure a balance between risks and opportunities. Taxation issues should be dealt with at the earliest stage, as many companies in the industry are already doing."

Portal "Eternal youth" http://vechnayamolodost.ru according to the materials of the PwC press service.

09.12.2009