Pharmaceutical companies are set to face "significant" increases in tax rates over the coming decade, as their businesses evolve and governments clamp down on avoidance, a leading tax adviser warns today.
In a report "Taxing times ahead", PwC says that rising public sector deficits and a shift in the strategy of pharmaceutical companies will intensify countries' efforts to clamp down on methods used by drugs groups to keep taxes low.
"For the past 20 years, pharma has benefited from a benign legislative and commercial environment that has enabled it to report low and stable tax rates," it said. "These elements are changing."
It said the trend by many large companies away from simply developing drugs to providing a broader range of healthcare services would reduce their ability to switch profits from high to low tax jurisdictions.
The pattern of cost cutting, improved research productivity, a broader mix of products, expansion in the emerging markets and offering "outcomes" rather than simply medicines will all have "major repercussions", it warned.
PwC said tax authorities were increasingly clamping down on "transfer pricing": the practice of shifting costs to higher tax regions and income to lower tax ones. They were also working more with their counterparts in other countries to reduce the ability to use crossborder transactions.
It cited more aggressive measures taken by the Internal Revenue Service in the US, and the measures adopted by the Organisation for Economic Cooperation and Development to blacklist tax havens.
It said such measures would offset continued moves by some countries to offer tax advantages to encourage domestic research and development by large foreign companies.
The consultancy highlighted wide variations in corporation tax rates currently paid by the large drugs manufacturers, ranging from 29.3 per cent in 2008 for Bayer of Germany to as low as just 14 per cent for Novartis of Switzerland.
In the US, it showed that pharmaceuticals including biotechnology remained among the lowest taxed corporate sectors at 32.5 per cent. Among the large companies, the average effective rate last year was 23.8 per cent.
PwC said companies might shift their legal status from being corporations to partnerships, create regional hubs and manage value added tax centrally to minimise tax bills in future.
Source: FT.Com
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