May Pharma & Life Science Get Together

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Willis Stokes
5 years ago
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1 May 2017 Pharma & Life Science Get Together

2 Introduction

Your contacts Monica Cohen-Dumani Partner Corporate Tax Patricia More Partner Indirect

3 Your contacts Monica Cohen-Dumani Partner Corporate Tax Patricia More Partner Indirect Taxes PricewaterhouseCoopers SA, Geneva Switzerland Phone: PricewaterhouseCoopers SA, Geneva Switzerland Phone: Dr. Sandra Ragaz Director - Leader Pharma & Life Science VAT Switzerland PricewaterhouseCoopers AG, Zurich Switzerland Phone: sandra.ragaz@ch.pwc.com Pharma & Life Science Get Together May 2017

4 Agenda 1. CTR III: three months after the popular vote, US Tax Reform and European Tax latest developments 2. Toll manufacturing in the pharma & life science sector 3. Sales of pharmaceutical products within Europe by Swiss established companies hurdles and opportunities Pharma & Life Science Get Together May 2017

5 1 CTR III, US Tax Reform and European Tax latest developments

6 2 Toll manufacturing

7 2 Toll manufacturing hurdles and opportunities Toll Manufacturing / Toll Processing VS Contract manufacturing What is Toll Manufacturing/Toll Processing? The Principal retains title of the goods throughout the manufacturing process The Principal will buy and hold legal title to the raw material, but the goods will be shipped to the Toll Manufacturer The toll manufacturer performs processing services, and is compensated by manufacturing principal through a toll manufacturing fee The manufacturing principal bears the risks associated with holding raw materials and finished goods inventory, as well as final demand and price risks Toll manufacturer s supplies are treated as services for VAT purposes in most of the countries Contract Manufacturing The contract manufacturer produces goods for manufacturing principal that directly bears demand and final customer pricing risk The contract manufacturer comply with the principal s guidelines, standards, products and quality specifications The contract manufacturer owns plant and equipment and purchase raw material according to the standards agreed with the Principal The contract manufacturer bears the risks associated with holding fixed assets and inventory Contract manufacturer s supplies are treated as supply of goods for VAT purposes Pharma & Life Science Get Together May 2017

8 2 Toll manufacturing hurdles and opportunities Toll Manufacturing / Toll Processing VS Contract VAT manufacturing Technical Toll manufacturing Contract manufacturing Suppliers Suppliers Payment for raw materials and semi-finished goods Raw materials and semifinished goods Payment for raw materials and semifinished goods Toll manufacturer Finished goods Toll manufacturing fee (markup on manufacturing costs) Finished goods Manufacturing Principal Payment for finished goods Contract manufacturer Finished goods Manufacturing compensation (consideration for finished goods) Manufacturing Principal Finished goods Payment for finished goods Goods legal ownership Customers Goods legal ownership Customers Goods physical flow Goods physical flow Pharma & Life Science Get Together May 2017

9 2 Toll manufacturing hurdles and opportunities Reporting Issues EU Member States: Typically toll manufacturer s supplies are treated as services for VAT purposes (Basic place of supply rule in EU) Physical movement of goods must be reported (as well as the supply of services) - By Principal/ toll manufacturer? - Key to distinguish from Contract manufacturing Reporting EU Member States: EU reporting requirements - VAT returns - Intrastat - EC Sales List - EC services List - Registers of the goods processed Pharma & Life Science Get Together Issues Switzerland: Typically toll manufacturer s transactions are treated as supply of goods for VAT purposes (i.e. place of taxation is where the goods are going to be processed) Physical movement of goods must be reported (as well as the manufacturers' transaction) The following two processes are possible for the physical movement of goods; - Definitive import into Switzerland, toll manufacturing of the products and definitive export of the processed goods - Inward processing in Switzerland: special procedure and documentation are required May 2017

10 2 Toll manufacturing hurdles and opportunities Point of attention Qualification of toll manufacturing VS contract manufacturing: Qualification of supplies depends on type of goods which are supplied by manufacturer; if e. g. these goods qualify as main material, supply would qualify as supply of goods; if goods are rather ancillary then the supply would qualify as supply of service; r/c procedure might apply. Customs duty reliefs may be applied where raw materials for manufacture are sourced from non-eu location. Physical flows of raw material & finished products: Bilateral work on goods / triangular / other Who is liable for the reporting?: Principal or toll manufacturer Pharma & Life Science Get Together May 2017

11 2 Toll manufacturing hurdles and opportunities Fixed establishment Why does it matter? Determination of place of supply B2B (Article 44 EU VAT Directive 112/2006) services taxable where the recipient has established his business. Article 11 Council Implementing Regulation no. 282/2011: A fixed establishment means: any place, other than the taxpayer's place of establishment of a business, which is characterized by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs (passive FE) to enable it to provide the services which it supplies (active FE) Determination of person liable to pay/ account for VAT VAT liability for local supply of goods might be in some countries shifted to the recipient if he is established in that country Input VAT refund The way how local VAT should be recovered will depend on the fact if company is or is not VAT registered (local VAT return vs VAT refund claim) Pharma & Life Science Get Together May 2017

12 2 Toll manufacturing hurdles and opportunities Fixed establishment = The Polish Cans case (I FSK 1379/15) main arguments of the court Literal reading Interpretation method Fixed = related to determined place, unchangeable, still and not temporary nor occasionally. Specific for SwissCo Actions taken by SwissCo aiming at diminishing its tax burden (lower VAT rate in Switzerland depending on the product) Optimisation Undefined period Contractual terms Undefined period of the tolling agreement (e.g. packaging services) supports the fact that the structure is not temporary FE Place of management Dependency Steering can be done on long distance, it however means that the external personnel in Poland was controlled and managed in an analogic way as own employees. Managed from abroad Footprint The resources in Poland were sufficient to allow to conduct business permanently and in some sense independently from the Swiss headquarter All infrastructure necessary to run the business Exclusive relationship The fact that SwissCo was the only customer of the Polish tolled supported the fact that the latter was dependent on SwissCo and therefore should be considered as SwissCo s own infrastructure Pharma & Life Science Get Together May 2017

13 2 Toll manufacturing hurdles and opportunities Reporting and IT Your ERP coding process must enable you to classify each transaction so that the tax determination logic within your ERP system applies the correct VAT treatment. Challenges: ERP systems native capabilities may be limited ERP set up may not be optimal. Limited resources Deadlines and time limits: on time reporting New reporting obligations Action steps: Improve your existing ERP set up or review your IT organisation Enhance your existing VAT and statistical reports Automate your reconciliation process Automate report testing and return preparation Pharma & Life Science Get Together May 2017

14 3 Sales of pharmaceutical 1products ITX Strategy hurdles and opportunities

15 3 Indirect Taxes: sales of pharmaceutical & life science products Sale of pharmaceutical products within the EU by non established companies - background 1/2 Recent developments show that health authorities increase audits and prevent the sale of pharmaceutical products within the EU under certain circumstances by companies located outside of the EU Legal basis: The pharmaceutical legislation, Art. 76 of the directive 2001/83EG, the anti-counterfeiting directive 2011/62 and correspondent legal acts implemented in 2015 in different EU Member States Consequences: Stricter controls of the sales channels in the EU member states by the health authorities and tighter implemented regulations (e.g. para. 52 of the pharmaceutical legislation in Germany). The sale of pharmaceutical products of a non EU established business is prohibited within the EU in case a wrong wholesaler license is used Pharma & Life Science Get Together May 2017

3 Indirect Taxes: sales of pharmaceutical & life science products Sale of pharmaceutical products within the EU by non established companies - background 2/2 Major challenges: - Restructuring the

16 3 Indirect Taxes: sales of pharmaceutical & life science products Sale of pharmaceutical products within the EU by non established companies - background 2/2 Major challenges: - Restructuring the current Swiss business model - Significant changes in the supply chain - Direct and indirect tax implications in Switzerland and in the European Union - ERP system and contract adaptions - etc. Action steps: It is crucial to ensure that the pharmaceutical companies are prepared to the new developments resp. have a solution at hand if already affected Pharma & Life Science Get Together May 2017

3 Indirect Taxes: sales of pharmaceutical & life science products Sale of pharmaceutical products within the EU by non established companies - client example Background: A Swiss based pharmaceutical

17 3 Indirect Taxes: sales of pharmaceutical & life science products Sale of pharmaceutical products within the EU by non established companies - client example Background: A Swiss based pharmaceutical company, sells drugs from UK to Germany. During an audit in UK the regulatory authorities have prohibited the company to sell the pharmaceutical products in Europe, because the lack of an appropriated license Flow of pharmaceutical products Sale of drugs by the Swiss based company UK Swiss based company issues the respective sale invoice and has the drugs in it s book DE 152 => The approach in solving the issue in a programmatic way requires a X-LoS approach: the list of requirements for obtaining an appropriated license from a regulatory point of view leads to Swiss and international direct and indirect tax as well as legal implications Pharma & Life Science Get Together May 2017

18 3 Indirect Taxes: sales of pharmaceutical & life science products Case Study Pharma & Life Science Get Together May 2017

19 Excurs: Indirect Taxes: Clinical Trials Are you ready for transparency? The new regulation for clinical trials <<<<<<<<<<< Annex 6 and 16 and impact on processes Impact on core processes/data of pharmaceutical companies Requirements for compliance and for sharing sensitive information (Annex 6 & 16) Company data will be disclosed in a new EU database (Annex 6) Data includes scientific and financial information (financial set-up and arrangements for rewarding or compensating subjects i.e. investigators and patients) Sponsors should prepare themselves for new transparency requirements that make them disclose, either directly or indirectly, information on the financial and tax position Pharma & Life Science Get Together May 2017

transaction structure (e.g. electronic health-check) 1.

20 How do we can assist you? Some examples Data analytics & Reporting tools help also identify risks and opptimize the transaction structure (e.g. electronic health-check) 1. STARS (Strategic Tax Accounting & Reporting Solutions) 2. Customised- Import tool 3. Healtcheck and machine learning 4. SAP Cockpit 5. SmartTools Pharma & Life Science Get Together May 2017

21 Discussion and Q&A Pharma & Life Science Get Together May 2017

22 Thank you for attending the Get Together This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers AG, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it All rights reserved. In this document, refers to PricewaterhouseCoopers AG which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

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