• Mischa Sollberger, Partner |

With the evolving life sciences industry, companies could benefit from reassessing and aligning their value chains and transfer pricing setup to the new business model reality reflecting current international tax requirements. 

Ongoing transformation in the life sciences sector

Several life sciences companies have been at the center of the media’s attention during the Covid-19 pandemic, revealing their weaknesses but also their strengths and the unique opportunities the sector offers. Transformations in the sector have been accelerated by the following aspects:

  • Increase of the M&A activity: life sciences M&A have been consistent throughout 2020 and 2021, driven by business growth, new product launches and government subsidies for the research and development related to vaccines and COVID-19 treatments.
  • Increase of liquidity: the general growth ambitions, the business model evolution and the impact of the pandemic have resulted in a significant amount of liquidity. KPMG’s M&A report shows a 107% growth in the number of deals for the pharmaceuticals and life sciences sectors compared to 2020 (deal value in USD of about 56.2 billion). 
  • Increase of governmental supports to encourage and stimulate the R&D cycle: faced with the urgency of the COVID-19 situation, governments have been mobilized to provide funding (e.g., tax credits, R&D incentives), to find appropriate treatments and decelerate the progression of the pandemic. Since experts agree that more and more pandemic episodes will occur in the near future, mainly due to globalization, climate change, and massive displacement of people, it is likely that most governments will continue to support R&D. In addition, the global pharmaceutical market was valued at about 1.27 trillion U.S. dollars as of end-2020 and therefore generates interesting tax opportunities for governments, willing to provide incentives to attract key players to their countries (e.g. in Switzerland).
  • Increase in innovation of service models: the pandemic has accelerated new healthcare service needs by patients and, in this respect, digitalization has also found its way into the life sciences sector with online medical appointments and online sales channels for medicines. This evolution must also be seen in the context of patients' increased attention to their health, but with a growing distrust of the pharmaceutical industry in general, leading to the development of alternative medicines.

The resulting business transformations in the life sciences sector should be monitored for any impact on their value chains and a required realignment of their transfer pricing setup. 

Such an exercise can get very complex due to its cross-functional nature, taking into account regulatory requirements, IP location, location of key personnel, optimization of product and title flows as well as finding the appropriate business location to operate the business successfully.

A challenging tax landscape to consider

The worldwide tax environment is constantly evolving, with more complex requirements for a harmonized and global tax system. 

The realignment of transactional flows to reflect new business realities and meet all shareholders objectives should also be driven by a reassessment of the transfer pricing setup and the indirect tax considerations (such as trade & customs, VAT). For mature companies with a commercial product portfolio, a reassessment of the right IP strategy, the legacy vs. future IP and potential exit tax risks may become even more relevant. 

Whether a new operating model is designed or not, life sciences companies should focus on the evolving international tax landscape such as BEPS 2.0 (especially minimum tax of Pillar 2), US tax reform and European tax developments. A challenging tax environment combined with many local, regional and global changes (i.e. Brexit, war, pandemic, supply disruptions etc.) will add significant complexities when reassessing life sciences companies ideal footprint for their operating models. 

Given the short timelines for the new reforms (i.e. most of which are set for 2023), it would be worthwhile to anticipate early how new developments affect a company and what needs to be done to ensure a robust and tax efficient business model in future.

Proactive alignment of business models and value chains

As the life sciences sector is evolving, so are companies’ value chains. In a transitional phase, the transformed business models and transfer pricing setup might not be properly aligned with value creation, which can lead to a risk of challenge from various tax authorities. As such, taking into account all tax, legal, regulatory and compliance elements, transfer pricing policies need to be reviewed and aligned to the evolved operating models of life sciences companies. One of the key issues is to allocate profits to the locations with the most important value drivers of the business. Otherwise, either the company is at tax risk due to incorrect transfer pricing given the actual substance or the tax model is inefficient as a result of misplaced value drivers.

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