Top health industry issues of 2018

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Tax reform moves forward

Republican lawmakers are moving forward with tax reform. While some of the specifics are still being negotiated, the outlines—a corporate tax rate reduction and a shift to a territorial system—are known. These changes will require new strategies from health organizations in 2018, and may demand rethinking of business models and supply chains.

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Kathleen Michael, PwC, US Pharmaceutical and Life Sciences Tax Leader, talks about how tax reform can fuel US pharma R&D

Tax legislation passed by the House Republicans in November proposed reducing the federal corporate tax rate from 35 percent to 20 percent.1 Doing so could help put US companies on more equal footing with foreign competitors when deciding where to invest in operations, how to structure their organizations and where to hold profits. It also could help spark new foreign investment and competition within the US.  

Of interest to businesses with foreign holdings—which includes many pharmaceutical and life sciences companies—is the transition from a worldwide to territorial tax system. Under the US’s current worldwide taxation policy, the amount of money held by US companies overseas has steadily increased because foreign earnings are subject to the US corporate tax rate only when they are repatriated to the US.2 In contrast, under a pure territorial tax system, foreign earnings would be taxed in the country where the profits were generated but not a second time when earnings are brought back into the US. This would give companies greater flexibility in how and where they spend their money.

As part of a territorial system, tax reform proposals have included a one-time mandatory deemed repatriation of US companies’ historic foreign earnings. Healthcare companies hold about 25 percent of the approximately $1.8 trillion currently held overseas by the 50 companies with the largest amount of indefinitely reinvested foreign earnings—the second largest share held by any industry (see Figure). Repatriation would give these companies a chance to bring these profits back into the US at a special tax rate.3

Pharmaceutical companies—and other organizations rich in intellectual property—are concerned that efforts to limit possible erosion of the US corporate tax base under a territorial system could target income from intangible assets.4 A so-called “round trip rule” would impose US tax on profits generated overseas related to products exported for sale to the US.  

“Without a doubt, the round-trip rule is the biggest thing we’re worried about,” said David Lewis, vice president of global taxes at Eli Lilly. “We’d be back to where we started; once again we’d be at a strategic disadvantage.” Facing higher tax rates and less flexibility with where to spend capital, companies fear the tax could make them targets for takeover by foreign companies.

For-profit companies that do most of their business domestically—like many health insurers and providers—are interested in proposals that would allow businesses to fully expense the cost of new depreciable assets, excluding structures, which could prompt investment in fixed capital and accelerate acquisitions.

Tax-exempt healthcare organizations are concerned about potential changes affecting charitable giving, such as repeal of the estate tax, a tax imposed on estate assets exceeding $5.49 million per person. Eliminating the tax could weaken the incentive for individuals to make philanthropic donations rather than bequeathing assets to beneficiaries. Tax-exempt organizations also are watching for proposals that affect standards for income tax exemption and excise taxes.

Implications

Prepare for technology updates

New tax provisions will require making updates to financial reporting systems to capture new and different information. Based on proposed reforms, companies should audit their systems to figure out what changes they will have to make. For instance, new capital expensing rules would require systems to be reprogrammed to calculate the depreciation of fixed assets differently.

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Continue to model as more information becomes available

As lawmakers get closer to final legislation, companies should continue to model proposed provisions’ effects and develop action plans to mitigate risks and take advantage of potential opportunities. This should include considering options for deploying repatriated cash and planning for resources to meet tax requirements on foreign earnings. Organizations with advanced insight into reform’s impact will build enterprise resilience, positioning themselves to respond to changes more quickly once they take effect. 

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Educate and advocate

Until tax reform legislation passes, companies should continue to educate industry trade groups and members of Congress about reform provisions’ potential implications. While all US businesses will support a lower corporate tax rate, healthcare companies will be competing with other industries to make sure tax reform legislation satisfies their priorities.

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1 PwC Tax Insights from Washington National Tax Services, “House Ways and Means Chairman Brady releases tax reform bill,” Nov. 2, 2017, https://www.pwc.com/us/en/tax-services/publications/insights/house-ways-and-means-chairman-brady-releases-tax-reform-bill.html

2 Don Whalen, Jessica McKeon and Chris McCoy, “Indefinitely Reinvested Foreign Earnings: Balances Held By the Russell 1000, A 9-Year Snapshot,” July 2017, Audit Analytic, http://www.auditanalytics.com/0000/custom-reports.php

3 White House press release, “Unified Framework for Fixing Our Broken Tax Code,” Sept. 27, 2017, https://www.whitehouse.gov/the-press-office/2017/09/27/unified-framework-fixing-our-broken-tax-code

4 Dave Ricks, “The GOP’s Tax Reform Framework is a Step in the Right Direction,” LillyPad (Eli Lilly Blog), October 17, 2017, https://lillypad.lilly.com/entry.php?e=10735

 

Contact us

Kelly Barnes
US Health Industries and Global Health Industries Consulting Leader, PwC US
Tel: +1 (214) 754 5172
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Benjamin Isgur
Health Research Institute Leader, PwC US
Tel: +1 (214) 754 5091
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Gurpreet Singh
Health Services Leader, PwC US
Tel: +1 (312) 298 2160
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Karen C. Young
US Pharmaceutical and Life Sciences Leader, PwC US
Tel: +1 (973) 236 5648
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