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Updated - Pharma companies face challenges with transfer pricing programmes

A report says that transfer pricing practices in the pharmaceutical industry will become more complex due to the economic and political pressures that companies in the sector are facing

The report, entitled Pharma 2020: Taxing Times Ahead: Which path will you take?, was compiled by PricewaterhouseCoopers and surveyed 35 senior tax executives from global pharmaceutical, biotech, and medical device companies. It asked them about key market factors that they expect will influence their company’s tax policy.

The report also demonstrated ways in which tax professionals can adapt their planning to remain competitive.

The report lists six issues for pharmaceutical and life sciences companies to consider, including complications to transfer pricing resulting from new and different allocation of income among the participants in a company’s supply chain.

As these companies begin to grow their customer base and expand into new and emerging markets, the report expects that the number and complexity of cross-border and intra-company transactions will increase, making compliance with tax laws in each jurisdiction more difficult. The result, the report suggests, will be that demand for tax professionals will rise to keep pace with increased vigilance and co-operation amongst the tax authorities in different countries.

“The state of the global economy is making most governmental authorities look for revenue” said Michael Swanick, partner and global pharmaceutical and life sciences tax leader at PwC. “This will affect most multinational companies as these foreign governments begin to revisit their tax systems.”

Swanick believes that this will especially complicate transfer pricing systems.

“As companies move into new markets, where each jurisdiction has their own rules and regulations, often with their own definition of what is an ‘arm’s-length’ transaction, transfer pricing practitioners are increasingly required to be more familiar with the various rules in each jurisdiction, and you’ll be seeing a greater demand for expertise in this area,” he added.

The changing methods these companies use to allocate income among the different elements of their supply chains will also complicate transfer pricing. It will be imperative for companies to prove to tax authorities that appropriate prices have been used in their transfer pricing programmes. This will require tax professionals to develop a deeper understanding of the intricacies of their company’s supply chain and manufacturing arrangements, and will necessitate a greater cooperation between tax professionals and the operational parts of their businesses.

“Transfer pricing executives will have to be more assertive,” said Swanick. “There are going to be multiple countries that are going to try and tax the same revenue. Tax professionals need to be out in front in meeting with local countries and need to be more aggressive in implementing advance pricing agreements.”

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