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Pharma faces rising taxes PwC report
December, 02nd 2009

Among the plethora of challenges the pharmaceutical industry is facing, tax is going to play an increasing role in the way companies make major strategic decisions.

This is the essence of a new report from PricewaterhouseCoopers, Pharma 2020: Taxing times ahead - Which path will you take?. It notes that the global financial crisis, government pressure and changing market dynamics are likely to drive up the effective tax rate for the pharma and life sciences industry.

In a poll of 35 senior tax executives within the sector, six in ten agree that an increase in the effective tax rate is inevitable. 63% feel that the cost on their organisations might eventually be passed onto consumers unless they find ways to operate more efficiently and transform their approach to R&D and sales and marketing.

62% of tax executives polled said they are looking to maximise tax credits and other incentives for R&D and all of them believe that the demand for tax specialists will grow substantially. More than half of the respondents said they are now being consulted early on by senior management in strategic business decisions, and thus have influence over the direction of the company.

The report notes that the global recession has made tax authorities around the world hungry for new revenue sources to overcome growing budget deficits and potential new costs associated with healthcare reform initiatives. Governments are therefore focused on the use of tax havens that allow multinationals to move profits offshore and will continue to scrutinise transfer pricing practices to limit abuse of intra-company transfers of expenses or profits.

PwC adds that economic substance of offshore operations will become increasingly more important. The consultant says that identification of uncooperative nations may become more common, and corporations that continue to use tax havens could face financial penalties and reputational damage.

The study goes on to note that there has been a resurgence in mergers and acquisitions, in-licensing and joint ventures, and each of these strategies comes with significant tax implications. Also, international competition is intensifying to attract new investment, particularly from emerging markets, and while this trend may further drive profit growth to the East, companies will need to balance increased income with higher tax rates and potential price controls.

Michael Swanick, global pharmaceutical and life sciences tax leader at PwC, said that tax planning will be a critical consideration, not an afterthought, of long-term business plans to grow, buy, merge or sell and it will be one of the most important considerations in deciding where to locate intellectual property, manufacturing and service delivery.

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