Emerging markets: opportunities in health sciences
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Transcript of Emerging markets: opportunities in health sciences
22nd Annual Health Sciences Tax Conference Road map to emerging markets: spotting opportunities and issues in health sciences December 5, 2012
Road map to emerging markets: spotting opportunities and issues in health sciences
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Disclaimer
► Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.
Road map to emerging markets: spotting opportunities and issues in health sciences
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Disclaimer
Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. For more information about our organization, please visit www.ey.com. This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are not necessarily those of Ernst & Young LLP.
Road map to emerging markets: spotting opportunities and issues in health sciences
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Panelists
► Chris Finnerty Ernst & Young LLP New York, NY
+1 212 773 7479 [email protected]
► Frank de Meijer Ernst & Young Terco São Paulo, Brazil
+55 11 2573 3413 [email protected]
► Ana Mingramm Ernst & Young LLP New York, NY +1 212 773 9190 [email protected]
► Tejas Mody Ernst & Young LLP New York, NY +1 212 773 4496 [email protected]
► Haroon Cheema Director and International Tax Counsel
Merck & Co., Inc. Whitehouse Station, NJ
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Agenda
► Emerging-markets overview
► Major emerging-markets tax trends: ► Transfer pricing (TP) under increased scrutiny ► Anti-avoidance challenges ► Tax administration and practice tightened
► Mergers and acquisitions
► Other regional developments and opportunities
Emerging-markets overview
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Pharmaceutical sales in emerging-markets Pharmaceutical sales in developed markets
Source: IMS Health, July 2012 *Compound annual growth rate (CAGR)
0
50
100
150
200
250
300
350
400
450
2007 2008 2013F 2020F
Sales
(US$
b)
Brazil Russia India China Mexico Turkey Korea
0
100
200
300
400
500
600
2006 2020F
Sales
(US$
b) EU 5 US
CAGR: 15.6%
CAGR: 11.2%
CAGR: 2.00%
Emerging-markets overview — faster growth than developed markets
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► Eli Lilly & Co.: emerging market revenue falls 4%
► Pfizer Inc.: scales back emerging-markets growth estimates
► Ernst & Young LLP: predicts $47 billion shortfall between forecasted sales and achievable sales for “Big Pharma”
► Emerging market growth drivers: ► Local competition for products and staff ► Construction of factories to facilitate sales approvals ► Pharmaceutical policy changes
Tax considerations are becoming increasingly more important for life sciences companies doing business in the emerging-markets.
Emerging-markets overview — struggles ahead?
Source: Wall Street Journal, August 20, 2012
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Tightened enforcement
Continuous change
Alignment with international practices
Regular tax inspections
Increased disclosures Tax reform
changes
Tax scrutiny of non-residents
More sophisticated
Expanded jurisdictions
4
1
3 2
►Taxpayers’ information gathering and exchange
►Tax internal control and tax risk profiling
►Strengthening of tax administration and collection
►Various transaction disclosure forms
►Limitation of benefits/anti-treaty shopping clauses in tax treaties ►Changes to tax administration and collection
►Evolving guidance ►Renegotiated tax treaties
►Tax residency
►Transfer pricing audits
►Specific anti-avoidance rules ►General anti-
avoidance/substance over form
►Beneficial ownership
►Permanent establishment
►Transfer pricing practices ►Advance pricing agreements ►Exchange of information
agreements ►Tax-free reorganizations ► International Financial
Reporting Standards
Emerging-markets overview — evolving tax landscape
Major emerging-markets tax trends — transfer pricing under increased scrutiny
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Major emerging-markets tax trends — transfer pricing, Asia-Pacific India ► Increasingly aggressive transfer pricing enforcement ► Key industry issues in recent transfer pricing audits concerning:
► Need to satisfy benefits test for management fee payout ► Basis of royalty determination; legal vs economic ownership ► Clinical data management, construed high end, 27% to 30% markup ► Clinical trial coordination, construed high-end research and
development, 22% to 25% markup ► Import prices of active pharmaceutical ingredients (APIs)/finished
dosage formulations (FDFs) ► Comparable uncontrolled price of generics deployed in audits
► Advertising, marketing and promotion expenses ► Compensation for marketing intangible in India
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Major emerging-markets tax trends — transfer pricing, Asia-Pacific ► Recent legislative changes to transfer pricing provisions:
► Scope of term international transaction enhanced; meaning of term intangible property clarified
► Transfer pricing made applicable to specified domestic transactions
► Procedural and penalty provisions tightened ► Recent introduction of advance pricing agreement (APA) rules
into India law: ► Alternate route to domestic appellate process ► Provision for unilateral, bilateral or multilateral APAs
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China ► Rapid growth in transfer pricing audit resources at the local
state tax bureau and State Administration of Taxation (SAT) headquarters level
► Stricter TP enforcement according to Guoshuihan [2011] Circular 167
► Industry focus on automotive, consumer products, pharmaceuticals, real estate, hospitality and logistics
► Marketing intangibles and location savings key audit issues ► Three-pronged approach to enforcement:
► Administration: change from investigation afterwards to precaution beforehand ► Service: actively promote APAs and mutual agreement procedures ► Investigation: deepen investigation and enhance intensity (industry focus)
Major emerging-markets tax trends — transfer pricing, Asia-Pacific
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► Increasing use in the region: mainland China, Singapore, Japan, South Korea, Taiwan, Indonesia, Hong Kong and India.
► APAs can provide certainty for significant investment decisions,
tax structuring and host location analysis.
Taxpayer benefit Tax authority benefit
Certainty of outcome Certainty of tax base
Bilateral/multilateral solution — elimination of risk of double tax
Knowledge-sharing from bilateral/multilateral negotiations
Avoidance of costly, protracted audits More detailed understanding of taxpayer
Dedication of more TP technical resources by tax authorities
Alternative approach to TP enforcement
Major emerging-markets tax trends — transfer pricing, Asia-Pacific APAs
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Major emerging-markets tax trends — transfer pricing, Latin America Brazil ► Published on April 4, 2012; effective as of 2013 with the option
to be applied for 2012 ► Minimum requirement for the application of the Brazilian
uncontrolled price method (PIC) ► The minimum statutory gross profit margin required when
applying the resale price method (PRL) for the import of goods, services or rights; ranges from 20%–40% depending on the industry
► Freight-on-board price as basis for the PRL calculation ► Changes to the deductibility of interest
Major emerging-markets tax trends — anti-avoidance challenges
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► Australia, China, Hong Kong, New Zealand and Singapore have general anti-avoidance rules (GAAR) currently; India is on the way.
► India, Indonesia, Japan and South Korea do not have GAAR provisions but rely on targeted anti-abuse rules/specific anti-abuse rules, substance-over-form and other measures, e.g., Limitation of Benefits (LOB)/anti-abuse provisions in tax treaties to prevent treaty shopping.
► Tax authorities are focusing more on thin capitalization, transfer pricing and treaty shopping (beneficial ownership).
► Permanent establishment as well as tax residency are increasingly audit issues.
► Disclosures, documentation and administrative burdens are increasing steadily in the region.
Major emerging-markets tax trends — anti-avoidance rules, Asia-Pacific
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Major emerging-markets tax trends — anti-avoidance rules, Asia-Pacific India ► GAAR introduced to counter aggressive tax planning; effective
April 1, 2013 ► Deferral to April 1, 2016 recommended
► GAAR triggered if main purpose or one of the main purposes is to obtain tax benefit and a tainted element is present
► Tainted elements test arm’s-length character, misuse or abuse of law, commercial substance or bonafides of arrangement
► Wide powers to tax authority to disregard or re-characterize arrangement if GAAR invoked
► Expert Committee (EC) constituted by Prime Minister: release of draft report (ECR) containing guidelines for implementation
► Provisions likely to be watered down
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Major emerging-markets tax trends — anti-avoidance rules, Latin America
Brazil ► New interpretations from the taxpayers’ council in Brazil
► Superior Tribunal de Justica interpretation on payment for imported services; no withholding tax on treaty countries
Mexico ► Tax authorities criteria and recent case law Peru ► New GAAR (effective July 19, 2012) Colombia
► Proposed anti-evasion rules
General trend to adopt substance-over-form approach and require business purpose:
Major emerging-markets tax trends — anti-avoidance rules, indirect share transfers
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Major emerging-markets tax trends — indirect share transfers, Asia-Pacific Australia ► Greater than 50% real estate test applies. China ► Circular 698: GAAR can be asserted to disregard
intermediaries and recast as a direct equity transfer. India ► Transfer of shares of foreign company deriving value
substantially from India will be taxed in India as law currently stands; many issues remain.
► EC recently released draft report of key recommendations. Indonesia ► Specific indirect transfer rule targets the use of special-
purpose vehicles domiciled in tax havens.
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Major emerging-markets tax trends — indirect share transfers, Asia-Pacific
Hong Kong, Malaysia, New Zealand, Singapore
► Nonresidents not taxed on capital gains.
Cambodia, Japan, South Korea, Philippines, Thailand, Vietnam ► Indirect share transfers currently not taxed.
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Major emerging-markets tax trends — indirect share transfers, Latin America Mexico ► 50% real estate test
Chile ► New rules effective as of January 1, 2013
Peru ► Subject to tax if Peru represents 50% of the value of the
shares transferred
Panama ► Applicable over Panamanian source income only
Major emerging-markets tax trends — tax administration and practice tightened
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Major emerging-markets tax trends — tax administration and practice tightened
► Significant activity in tax audits throughout the region
► Generally aggressive audits and large assessments
► Cross-border transactions and transfer pricing
► Pre-controversy management: ► Need to maintain adequate supporting documentation ► Severe penalties and fines imposed by countries in certain countries ► Need for active involvement at the discovery level
► Exchange of information agreements
Mergers and acquisitions
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Mergers and acquisitions — Latin America
► Investments and acquisitions ► Made through favorable jurisdictions (Netherlands, Spain, Switzerland) ► Leverage strategies available in most jurisdictions ► Goodwill amortization variable among countries (Brazil, Chile)
► Divestments and exit planning ► Capital gains tax on sale of shares:
► Book value possible in limited countries ► Use of tax treaties to limit capital gains tax
► Reorganizations ► Mergers usually tax free ► Tax free spin-offs (de-mergers) generally possible with few exemptions
(Venezuela, Central America, Uruguay) ► Holding period requirement
► Mexico, Argentina, Peru and proposed changes in Colombia
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Merger
Slump sale
Itemized sale
Business reorganizations Acquisitions
Mergers and acquisitions
Demerger Asset purchase Share purchase
► Planning inbound structure:
► Comply with Indian regulations/laws
► Structured through tax-efficient jurisdictions
► Hybrid financing possible but requires structuring
► Tax diligence necessary
► Generally tax neutral subject to conditions
► Indian acquiring vehicle can be a corporate or a limited liability partnership
► Possible to claim goodwill amortization
► Sell side tax costs and transaction costs to be analyzed
Mergers and acquisitions — Asia-Pacific, India
Other regional developments and opportunities — Latin America
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Other regional developments and opportunities — Latin America
► Significant tax reforms throughout the region ► Argentina
► Significant changes to foreign-exchange controls ► Proposed tax reform for 2013
► Chile ► Tax reform enacted in 2012
► Peru ► Tax reform enacted in 2012
► Colombia ► Proposed tax reform for 2013
► Active increase in tax treaties throughout the region
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Other regional developments and opportunities — Latin America
► Shared service centers and management fees ► Reduction of withholding taxes
► TreatyCo with Panama Branch ► Use of foreign tax credits
► Shared service centers in Mexico or Brazil
► Supply chain opportunities ► Expanding treaty network ► Free trade zones in the region
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Other regional developments and opportunities — Brazil indirect taxes (ICMS) ► Senate Resolution 13 introduced ► By 2013, Interstate ICMS value added tax (VAT) rate at 4% for
imported goods ► 2012 rate at 7% or 12% ► Reason: use of import state incentives avoided ► Result:
► Huge buildup of ICMS credits in Brazil ► Use of incentives less attractive ► Rising tax costs
► New supply chain planning needed ► Same rules applicable to locally manufactured goods by 2020
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Other regional developments and opportunities — Brazil localization for medical equipment
► High demand for medical equipment in Brazil ► Customs duties low; no local production yet ► Initiatives for local production begun ► High financing costs for users ► Alternative: use of Finame for locally produced equipment ► Bidding process of public hospitals: locally manufactured
equipment preferred even when cost margin is higher (up to 25%)
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► Low factory price ► Basis for manufacturing taxes:
► Single turn-over tax (PIS/Cofins) ► Advanced ICMS (ST)
► High commercial price ► Manufacturing taxes no longer due
Consumer
Distributor
Factory
Create own distribution center to save on turn-over tax (PIS/Cofins) and substitute state VAT (ICMS)
Other regional developments and opportunities — Brazil indirect tax distribution planning
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Other regional developments and opportunities — future trends in trade Blocs
► Mercosul, CAN and others ► Trend towards protectionism in recent years
► Mercosur maximum external tariff to 35%
► Mercosur trade Bloc appearing continually weaker: ► Fractious relationships between the parties ► Impact on Venezuela’s admission
► Mercosur opposed to entering FTA relationships with US ► US looking for more bilateral agreements ► Mercosur not successful:
► Little growth in export trade between the member states ► Disputes between Argentina and Brazil
► Economic momentum of both Mercosur and CAN slowed ► Truly integrated South America Trade area unlikely in next
5 to 10 years
Other regional developments and opportunities — Asia-Pacific
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Other regional developments and opportunities — indirect taxes, India ► Paradigm shift in taxation of services: all services taxable
except negative/exempt list ► Exemption to export services based on newly introduced place-
of-provision-of-services rules ► Seeming impact on technical testing/clinical trial services
► Cumbersome refund process for exporters of goods and services
► Import prices of APIs/FDFs subject to investigation by special valuation branch of India’s Central Board of Excise and Customs
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Other regional developments and opportunities — indirect taxes, China
► Pilot locations: Shanghai,
Beijing, Anhui, Jiangsu, Fujian, Guangdong (includes Shēnzhèn), Tianjin and Hubei
► Pilot services:
► Transport service ► Certain modern
services industries
► Applicable rates: 17%,11%, 6% and 3%, depending on different classes of VAT payers of the VAT pilot service
► VAT pilot locations and covered industries
Region Launch date
Shanghai January 1, 2012
Beijing September 1, 2012
Anhui and Jiangsu October 1, 2012
Fujian and Guangdong (includes Shēnzhèn)
November 1, 2012
Tianjin, Zhejiang and Hubei
December 1, 2012
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Questions?