Pharma 2020: Taxing times ahead

Which path will you take?

In a previous Pharma 2020 series white paper, Pharma 2020: Challenging business models, we discussed that the Pharma industry will have to find new way of doing business. They will need to be more collaborative in addition to improving R&D productivity, reducing costs, expanding their presence in emerging markets, switching from selling medicine to managing outcomes and embracing the changes taking place in the broader healthcare arena. Those changes, together with the political and economic trends now shaping the general commercial environment, will have major repercussions on the way in which Pharma is taxed.

The fifth paper in the series, Pharma 2020: Taxing times ahead, focuses on the challenges ahead but also shows how companies can adapt their tax planning to support the provision of outcomes-based healthcare and remain competitive.

The report anticipates that:

• A new way of doing business is inevitable, but new models will make tax planning more complex and increase the effective tax rate for the industry. Pharmaceutical companies will form more partnerships, alliances and turn to M&A as well as embarking on a programme where they will provide diverse services beyond the traditional product offering and to fill the product pipeline. This model could cause the effective tax rate to rise, make transfer pricing procedures more complicated and potentially result in a greater disconnect between revenue and costs from a tax point of view.
• An expanded customer base, created by wider access to healthcare and growing populations in emerging markets will increase profitability. Further, healthcare reforms, technology advancements and other market forces are driving outcomes-focused healthcare delivery. Pharmaceutical companies will need to create greater value and demonstrate effectiveness by shifting from a purely product-centric focus to a broader service model, complementing traditional products with holistic packages of services to improve patient outcomes. Increased end-market services are taxed differently than products resulting in a shift in the tax burden.
• There will be heightened competition between states and among emerging market countries and those historically favourable to the industry to attract pharmaceutical and life sciences companies through tax incentives. As such, there will be a shift in profit growth to the East and increased outsourcing of manufacturing to emerging markets.
• Long-term business plans to grow, buy, merge or sell will be the crux, not the afterthought, of tax strategy for pharmaceutical companies. In the future, tax strategy will be even more closely aligned with business development strategy, and tax executives will occupy an important seat at the table as pharma companies contemplate business model changes.