How life sciences and healthcare companies deal with tariffs, disincentives, and grants

The global tax and regulatory environment is rapidly evolving, with significant implications for life sciences and healthcare (LSHC) companies. These businesses often operate complex, international value chains, making them especially vulnerable to changes in tax rules, tariffs, and other regulatory measures.

One major development is the OECD’s pillar two framework, which introduces a global minimum tax for large multinationals. This could shift tax competition beyond tax rates and push governments to use grants, tax credits, and subsidies to attract investment and support innovation in key sectors such as life sciences.

At the same time, trade- and tax-related disincentives are increasing. While some LSHC products are currently exempt, future tariffs on critical inputs or finished goods could disrupt global R&D, manufacturing, and distribution. Domestic tax measures, such as the US base erosion and anti-abuse tax (BEAT), also pose challenges by penalising cross-border payments common in centralised business models.

This article explores how LSHC companies are affected by this evolving regulatory environment and, in particular, the transfer pricing implications that may result from these developments.

The LSHC industry encompasses various segments with distinct value chains. For many segments, the cross-border transportation of products and the integration into global value chains may be crucial. This is particularly evident in the pharmaceutical and medtech industry, as detailed below.

The pharmaceutical industry has grown significantly over recent decades, driven by advancements in DNA/RNA and cell/gene therapies, and growth rates are expected to remain high. This has led to globalised and complex supply chains, with production spread across the world; in particular, the US, Europe, and China, according to analysis by Statista.

Pharmaceutical manufacturing is subject to stringent regulatory requirements that generally make it inefficient and impractical for companies to establish production facilities in every target market, which would necessitate extensive validation, inspection, and certification processes. Therefore, companies often centralise production in strategically located facilities that serve multiple markets. As such, manufacturing excellence clusters have emerged in certain regions.

For instance, many companies have outsourced production to contract manufacturers, with companies in China and India dominating, in particular, the production of active pharmaceutical ingredients (API) and intermediate products. Next to China and India, Europe remains a key region for API manufacturing. Finished dosage forms, due to stricter regulations and a shorter shelf life, are often manufactured and distributed regionally (see Deloitte US’s blog post Did removing weak links make pharma supply chains stronger?).

These developments have also strengthened Europe’s position as a global logistics and manufacturing hub for pharmaceutical products, with countries such as Germany, Belgium, and Switzerland as top exporting countries (see Mordor Intelligence’s Europe Pharmaceutical Logistics Market Analysis, and the United Nations’ Interstitial Guidance on Transfer Pricing in the Pharmaceutical Industry).

While the transportation of pharmaceutical products may face specific challenges – including regulatory requirements, quality assurance obligations such as temperature regulation for biologics, or pressures to adopt sustainable logistics solutions, given the move towards global supply chains – more advanced logistics technologies have emerged that companies can make use of (see Trax’s Transportation Spend Management for Pharmaceutical Companies).

In addition, many pharmaceutical products, such as tablets or capsules, are generally stable, lightweight, and compact, making them well suited for global transportation. These products are typically packaged in secure primary and secondary packaging – such as blister packs, vials, and boxes – that facilitate efficient shipping and handling.

Thus, multinational companies in the pharmaceutical sector generally operate within globalised value chains, characterised by significant volumes of (intercompany) cross-border product transfers.

Similar observations apply for medtech companies. While the transportation of larger medical devices can be challenging, even long-haul transport is possible for most of these devices (albeit at a certain cost) and non-transportability would generally apply to only a smaller portion of relevant material, such as radioactive substances.

Against this background, many LSHC companies may be vulnerable to the geopolitical and economic developments of recent years, such as supply chain distortions resulting from the COVID pandemic, regulatory developments affecting tax competition between countries, or trade tax policy developments. In the following section, an overview of the corresponding transfer pricing implications is provided.

With the introduction of the OECD/G20 Inclusive Framework's pillar two global minimum tax rules, the worldwide regulatory framework for taxation is shifting. The rules were agreed upon in October 2021, with the implementation of national regulations ongoing. Pillar two aims to ensure that large multinational corporations pay a minimum effective corporate tax rate of 15% on profits earned in each country in which they operate.

As a consequence, tax competition between countries is likely to shift beyond tax rates. Several countries have implemented tax incentive regimes as dominant measures to promote the local performance of R&D activities, as noted by the OECD. Corresponding incentive regimes may take different forms, such as tax credits, tax (super) deductions, patent boxes, industry-specific credits, or deductions and grants.

While some of these tax incentives could lead to top-up taxes under the pillar two regulations due to effects on the effective tax rate, for other incentive schemes this may not, or not fully, be the case. For example, tax incentives that depend on a certain level of local tangible investment may be less affected by pillar two as the resulting potential low-taxed profit would be partially protected through an income exclusion regulation. As pillar two applies to corporate tax exclusively, tax incentives in relation to taxes other than corporate taxes (e.g., property, energy, and payroll) remain unaffected (see the European Parliament’s Tax incentives after the minimum corporate tax ('Pillar Two')). Against this background, it is expected that countries will review and modify their tax incentive landscape and put more emphasis on schemes that do not feature an unfavourable interplay with pillar two (see Deloitte’s The Future of Tax Incentives).

In addition to the increased future role of tax incentives, there is a trend towards disincentive measures.

One notable example with regard to tax policy developments is the US BEAT regulations, which were introduced in 2017. The BEAT regulations are designed to prevent large multinational corporations from shifting profits out of the US to lower-tax jurisdictions and thereby eroding the US tax base. This has been implemented by imposing a minimum tax on certain deductible payments made by US companies to their foreign affiliates. With recent discussions on broadening the scope of BEAT and increasing the rate, it is to be expected that the role of such disincentives may become even more pronounced.

Another example of disincentives concerns the recent US trade policy and the announced shift towards tariffs and other trade barriers. While there are still important uncertainties as to how such policies might play out in detail, significantly higher tariffs for many products are to be expected in the future – potentially also for LSHC products.

The regulatory changes described above are likely to affect LSHC companies, especially due to their global footprint and often complex value chains. From a transfer pricing perspective, these changes lead to several questions and implications, which are set out below.

First, the question arises as to whether, and if so how, the local (tax) advantages should be taken into account for transfer pricing purposes. Consider the example of a pharmaceutical group company providing contract R&D services to foreign related parties. In a transfer pricing context, such services are typically remunerated on a cost-plus basis, where the cost base would typically aim to capture the costs of service provision adequately. The question then is whether the cost base relevant for intercompany remuneration would be impacted by grants/incentives. This would result in the question of whether these grants/incentives are ultimately to be received by the contract R&D service provider or should be passed on to the principal under arm’s-length conditions.

For instance, consider a contract R&D service provider in country A providing its services to its headquarters in country B. Assume that the contract R&D service provider incurs costs of 100 for rendering its services, for which, according to the intercompany contractual set-up, it would be remunerated at cost plus 10%. Furthermore, assume that country A has an R&D incentive programme in place that would reimburse companies for 10% of their R&D expenses. Hence, the contract R&D service provider would be entitled to a corresponding reimbursement of 100 * 10% = 10. If the contract R&D service provider would be entitled to keep the R&D incentives, its profit would amount to 100 * 110% (cost-plus remuneration from its service provision) - 100 (cost of service provision) + 100 * 10% (R&D incentives) = 20. If, however, the R&D incentives would be offset against the cost of service provision, the profit of the R&D service provider would amount to only (100 - 10) * 110% (cost-plus remuneration from service provision) – 100 (cost of service provision) + 100 * 10% (R&D incentives) = 9.

Second, in the case of disincentives such as tariffs, firms may try to mitigate their impact by limiting the amount of sales on which the disincentives apply. In a transfer pricing context, one way to do so may be by means of ‘unbundling’, which entails the delineation of different components of an intercompany transaction.

Consider a high-specification medtech device that is running on a sophisticated software. As tariffs would generally apply only on the physical importation of goods, firms may try to disentangle physical product and software transactions and determine separate transfer prices for them. This could mitigate a potential negative impact on firms in the event that no disincentives would be applicable for the provision/licensing of software. While unbundling could hence lead to the disincentives being applicable to only a smaller portion of sales, taxpayers need to carefully design and document such strategies to ensure compliance with the transfer pricing regulations in all affected jurisdictions.

Another aspect to consider is that, particularly for medtech companies, a degree of localisation of products may be required as the product demand may vary between countries. For instance, in emerging markets, the focus may be more on costs rather than the latest technology, favouring demand for well-established products rather than cutting-edge technology. In such cases, it may be helpful for firms to have activities pertaining to product localisation performed locally.

Moreover, local tax and trade policy regimes may provide incentives for firms to perform value-adding activities locally rather than centrally. For instance, tariffs on imports may favour the importation of intermediate products for final production rather than finished goods, as this would generally decrease the value of the imports and therefore tariffs. To the extent that such localisation endeavours lead to the change of existing value chains and/or intercompany transfers of intangible assets, exit tax implications may arise and are to be carefully analysed.

As laid out above, tax competition is shifting from a focus on tax rates to an increased importance of tax incentives and grants, while disincentives are on the rise. Such developments affect companies operating in the LSHC sector, where business is potentially more mobile and value chains are often centralised. Industry-specific factors play a role, which should be analysed in the context of a robust functional and risk analysis, and be documented accordingly in order for companies to be able to defend their transfer pricing set-up, including the treatment of the industry’s idiosyncrasies.

Given the substantial recent shift in dynamics, it is crucial for companies to closely monitor developments and reflect them in their intercompany trade set-up accordingly.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (DTTL), its global network of member firms, and their related entities (collectively, the “Deloitte organization”). DTTL (also referred to as “Deloitte Global”) and each of its member firms and related entities are legally separate and independent entities, which cannot obligate or bind each other in respect of third parties. DTTL and each DTTL member firm and related entity is liable only for its own acts and omissions, and not those of each other. DTTL does not provide services to clients. Please see www.deloitte.com/about to learn more.

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited (DTTL), its global network of member firms or their related entities (collectively, the “Deloitte organization”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser.

No representations, warranties or undertakings (express or implied) are given as to the accuracy or completeness of the information in this communication, and none of DTTL, its member firms, related entities, employees or agents shall be liable or responsible for any loss or damage whatsoever arising directly or indirectly in connection with any person relying on this communication. DTTL and each of its member firms, and their related entities, are legally separate and independent entities.

© 2025. For information, contact Deloitte Global.