Managing Indirect tax in a complex regulatory landscape
Indirect taxes in the Life Sciences industry
28 September 2017
The life sciences industry operates in one of the most regulated business environments. Companies face particular compliance challenges as they seek to push the boundaries of innovation, by developing and launching new products that address unmet patient needs, but for which there is often little or no regulation. Nowadays, organisations of all sizes deal with a highly complex and changing set of global, regional, country, and industry-specific laws and directives that span a drug or device’s developmental and commercial lifecycle. Primary regulatory focus areas include cybersecurity, drug and device safety, counterfeit drugs, intellectual property protection, corruption and proliferation of biological and chemical weapons.
From a trade compliance and regulatory compliance perspective, existing industry specific rules and regulations affect a company’s operations, typically with respect to sourcing, production, warehousing and distribution / supply. These rules and regulations may be very stringent and must go hand in hand with the governance of a company’s indirect tax activities and structures.
As an example, one may think of product specific restrictions on the movement of controlled substances such as narcotics, psychotropics, biologics, precursors and the like. Depending on the concerned product and its related rules and regulations, generic and/or transaction based license requirements may apply when these products are imported, exported or even in transit throughout the European Union. When dealing with the regulatory license obligations upon import, export or transit, it is key to check this against the requirements from a customs, VAT and corporate tax perspective, as there may be setup restrictions.
Continued developments in the area of industry-specific laws and directives, such as those on the importers definition foreseen in the draft Annex 21 to the new EU Good Manufacturing Practice Guidelines (GMP), also need to be monitored closely as these may also affect indirect tax. In regulatory terms, the modification would possibly entail a switch from a flow of goods based import concept to import based on financial flow. In principle, a party based in the EEA (European Economic Area) will likely be considered as the importer for regulatory purposes. In such case, it would multiply the licenses needed and potentially require companies, especially smaller to medium size businesses, to change the structure of their supply chain in order to match the new policy.
In addition, export control regulations need to be complied with when exporting controlled products, technology or know-how. Export controlled products may concern military goods and “dual-use” goods (i.e. goods, software and technology, that can be used for both civilian and military applications and/or can contribute to the proliferation of Weapons of Mass Destruction). Within the industry, we typically find examples of controlled dual-use goods in biological material (e.g. pathogens, toxin) or biomedical and chemical handling items (e.g. valves, pumps). In this respect, the proper analysis and checks need to be put in place before exporting goods to ensure that products can be exported and that the necessary clearance can be obtained from the concerned governing authorities. Next to the goods, the transfer of technology and “know-how” related to a controlled product may also be subject to authorisations / licenses before “exportation”.
Non-compliance regarding these controls may typically lead to supply chain disruptions, fines, penalties, brand damage, loss of customs and/or VAT related privileges or authorisations, prison sentences, etc.
A key take-away from the above is that one should take a proactive approach to tracking and monitoring regulatory and export control related developments, and understand their individual and combined impacts on indirect tax matters. In this respect, companies should look well beyond the basic, functional-level regulatory and export controls compliance requirements. Instead, one should also identify, analyse and mitigate potential risks linked to these areas from an indirect tax perspective.