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Reports suggest tax rate may increase

The evolving pharma model will make tax planning more complicated and challenging, according to a PricewaterhouseCoopers report

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, according to PricewaterhouseCoopers (PwC) in its report entitled Pharma 2020: Taxing times ahead - Which path will you take? The industry's response to these trends, and diminishing reliance on the blockbuster, will make tax planning more complicated and challenging for these companies, the report indicates.

PwC conducted a poll of 35 senior tax executives from pharmaceutical, biotech and medical device companies. Of these, six in ten agreed that an increase in the effective tax rate for their industry was inevitable. A total of 63 per cent agreed that the cost of increased taxes on their organisations might eventually be passed on to consumers unless they found ways to operate more efficiently and transform their approach to R&D and sales and marketing. 62 per cent said they were looking to maximise tax credits and other incentives for research and development.
 
The paper said that governments would be more focused on companies' use of tax havens with corporations that continued to use them potentially facing financial penalties and reputation damage. Shifting emphasis from products to a service model could mean both the supply chain and intellectual property (IP) become geographically dispersed. This suggests companies may see new and higher taxes as service providers and less flexibility to allocate profits to lower tax rate locations. Furthermore, locating service providers in end markets could create permanent establishments in multiple tax jurisdictions, increasing the risk of double taxation disputes.  
 
The current trend towards mergers and acquisitions, in-licensing arrangements, partnerships and joint ventures could also have 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.
 
International competition is intensifying to attract new investment, particularly from emerging markets like China. This may drive profit growth to the East, but increased income would have to be balanced against higher tax rates and potential price controls.  

2nd December 2009

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