Managing the effective tax rate

As the pharmaceutical companies grapple with ways to grow revenues, reduce costs and compete with the generics, one area worthy of heavy focus is the overall effective tax rate.

The first obstacle to reducing the effective tax rate is the ever-increasing rate of regulatory and compliance requirements imposed by governments worldwide. Increasingly, taxing authorities are focusing on companies with extensive worldwide operations trying to challenge their business models, and often to tax additional income originally allocated and taxed in another (usually lower-rate) jurisdiction.

Also, the downturn in the global economy has had far-reaching impacts forcing companies to focus on cost-saving initiatives, including headcount reductions, and putting stress on finance and tax departments alike.

Although optimising costs will always be important, reinvigorating Research & Development (R&D) will most likely be a top strategic initiative as well. Most big pharmaceutical companies are under competitive pressure from generic drug providers, and this pressure stands to grow more intense as a wave of patent expirations for certain “blockbuster drugs” occurs over the next few years. In many areas of the world, increasing spending on R&D can reduce a company’s effective tax rate, as many jurisdictions offer incentives (including tax credits) for such spending.

Future stock-price performance may hinge not only upon successful new product launches, but also on revenue growth in other areas, such as (health services). Traditional pharmaceutical companies may now find it strategically beneficial to place significant focus on leveraging their pipelines and entering new business ventures, such as licensing deals and acquisitions.

Many jurisdictions offer tax incentives to companies making investments to encourage local growth. However, in order to qualify for such incentives and tax reductions, companies may face increased compliance requirements. Additionally, licensing deals and acquisitions may bear other unintended tax costs that adversely impact the effective tax rate. Carefully structuring such deals is essential to ensure alignment of a company’s business goals with optimal tax treatment.

As multinational businesses are increasingly affected by tax, legislative and regulatory developments throughout the world, understanding the impact of these developments on business operations, and on the effective tax rate, is vital for a company’s survival.

How PwC's consultants can help you

With 32,500 dedicated tax professionals in over 153 countries, PwC's is a global market leader for tax services. We assist businesses, individuals and organisations with tax strategy, tax planning and compliance, while also delivering a wide range of business advisory services. Thus we have the power to support companies both locally and globally, wherever tax advice is required.
We adopt a holistic view, combining industry insight with the technical skills of financial and tax professionals, economists, lawyers and our other in-house resources as needed, to develop comprehensive, integrated tax solutions for our clients. We can offer tax advice in every facet of the pharmaceutical business, whether it is assistance with international tax structuring, mergers and acquisitions, transfer pricing or global compliance, to name just a few. Our network of PwC professionals are experienced in addressing global developments as well as in all aspects of taxation, (domestic and international).

We can help you structure your business in a tax-efficient manner, both locally and globally, and assist you in achieving their goals in the most tax-efficient manner, whether it be on small, tax-specific projects (e.g., R&D tax credits,) or providing tax planning on a “macro-level”. No matter which direction you choose, such planning can result in improved cash flow and a reduction in the overall effective tax rate.