The challenges plaguing the medical products supply chain—lack of geographic diversity, limited numbers of suppliers for essential medicines, inability to predict demand surges, and limited purchasing power of small and midsize health systems—existed before the COVID-19 pandemic but have been exacerbated by the crisis.
From managing the cost and tax implications of onshoring manufacturing to developing a network approach to redundancy, PwC’s Health Research Institute (HRI) expects the health industry in 2021 to start to reconstruct the supply chain to function more flexibly, as it does in other industries, such as automotive or technology. HRI spoke with Blanca Kovari, a principal in PwC’s transfer pricing practice, about the tax considerations for 2021.
Our “Top Health Industry Issues of 2021” report found that 94% of pharmaceutical and life sciences executives see supply chain improvement as a priority for 2021. How does tax strategy factor into pharmaceutical companies’ efforts to build a more resilient and responsive supply chain?
In today’s evolving tax environment, taxes are a critical consideration that must be included in the equation of supply chain business decisions. To keep it simple, every supply chain scenario may have a prohibitive tax cost or material net tax benefit associated with it. Successful companies that want to stay competitive and strategically manage the cost of their supply chain will carefully look at their tax strategy and the tax impact of their supply chain evolution. In the pharmaceutical industry, a resilient and responsive supply chain that appropriately manages tax considerations will lead to more funds being available for R&D activity or other investments that repurpose the business to be more fit for the future.
Recent US and local country tax reforms have introduced new and complex rules, and further tax reform may be expected both in the US and internationally along with the outcome of the Organisation for Economic Co-operation and Development’s work on the Inclusive Framework on Base Erosion and Profit Shifting, known as the BEPS 2.0 project. In this context, pharmaceutical companies are navigating unprecedented tax complexity and uncertainty and need to be prepared to understand the tax benefit or cost associated with multiple supply chain scenarios.
Companies can reap significant tax savings by proactively coordinating business and tax strategies around supply chains.
HRI: An HRI survey found that 82% of pharmaceutical company executives expect to reshore components of their supply chains within two to five years. What from a tax perspective needs to be considered?
Blanca Kovari: Any realignment of the supply chain in the form of onshoring or nearshoring will have tax implications, either favorable or unfavorable. In selecting where to locate a certain supply chain activity, pharmaceutical companies may face a direct tax cost of choosing a higher-tax location versus a comparable lesser-taxed jurisdiction. In other words, relocating certain key supply chain activities may alter the allocation of income between the jurisdictions involved, may have potential exit taxes in the jurisdiction from where certain activities or assets are transferred out, and may lead to qualifying for certain tax incentives in the jurisdiction to which activities or assets are transferred to. It is important for supply chain decision-makers to proactively consult with tax stakeholders to assess the pros and cons of these various supply chain alternatives.
In the ideal scenario, business and tax considerations converge and lead to the same answer. However, given the current macroeconomic and political complexity, companies need to be prepared to make pragmatic decisions that best advance their agenda and position them for sustainable success. It is also noteworthy to mention that the complex supply chain equation that pharmaceutical companies need to solve does not have stable variables, as one may expect further developments in the countries’ tax rates, local tax incentives, trade tariffs, etc.
HRI: One big tax decision that companies have to make is how to handle intellectual property. How are you helping clients with tax issues related to intellectual property?
Blanca Kovari: Intellectual property is definitely a key value driver in the pharmaceutical industry that attracts high returns. Pharmaceutical companies typically have fairly well-defined tax strategies that address the role of various value chain participants that develop and own intellectual property and the allocation of income to these group affiliates. Supply chain changes pertaining to onshoring or nearshoring may impact the current intellectual property arrangements and materially distort the allocation of income between the various jurisdictions. For example, a US pharmaceutical company that develops intellectual property in the US and licenses this intellectual property to a manufacturer located in a lower-tax jurisdiction will obviously have to reconsider this licensing transaction if the manufacturing activities are onshored or nearshored. Depending on the tax rate arbitrage, the impact of this onshoring or nearshoring on the company’s ETR may be significant if the licensing transaction was resulting in shifting considerable income to the lower-tax jurisdiction of the manufacturer.