Deloitte China LSHC Tax Seminar Recap and Industry Survey

On 16 October 2020 in Shanghai, Deloitte China held a seminar on Life Sciences & Health Care (LSHC) Tax Hot Topics. The seminar discussed supply chain model re-organization and tax optimization under new medical reform. More than 50 finance and tax representatives from well-known multinational and domestic LSHC companies, and representatives from bio-science parks, joined the seminar.   

Jens Ewert (Deloitte LSHC industry leader) delivered the opening remarks, and James Zhao (Deloitte China LSHC Industry Tax leader), Jeff Xu (Government & Public Services Industry Tax leader) and Dolly Zhang (Indirect Tax partner), shared their views on the challenges and opportunities for industry participants arising from new medical reform. Deloitte experts also shared with participants how to use various national and local government industry incentives in a systematic way. Representatives of Hainan Economic Development Bureau were invited to share the province's latest free trade policies.

Key topics discussed at the seminar

There are profound challenges and opportunities for businesses in new medical reform.  New policies such as Volume-based Procurement ("VBP") and dynamic adjustment of the insurance catalogue for medicines ("Catalogue Adjustment") have caused sharp drops in prices of drugs and devices.  The "two invoice-system" has also forced players to reduce distribution layers and reorganize their sales channels. The market authorization holder ("MAH") system has spurred industry R&D and innovation.

All of these reform policies have encouraged or forced industry players to re-examine their supply chain models across R&D, production, and distribution, while considering ways to accelerate the introduction of new products to the Chinese market.  

These medical reform policies also create opportunities for companies to optimize their tax approaches for after-tax value creation. In particular, finance and tax professional need to consider the following questions related to their businesses:

• How to optimize tax and transfer pricing models to correspond with supply chain reorganization and R&D/IP ownership optimization?
• How to effectively use industry incentives when introducing new products to market and reorganizing supply chains?  

Industry survey results

Deloitte conducted an on-site survey of industry representatives at the seminar, asking them which topics are of greatest concern to their businesses.

The survey found many LS companies have undertaken supply chain reorganization, greater R&D investment, the introduction of new drug products from abroad, and other measures, to respond to new medical reform. From a finance and tax perspective, they are placing greater emphasis on using tax incentives and government subsidies, business model reorganization, and TP/IP arrangements to maximize tax efficiency for value creation and to mitigate potential tax risks.

A summary of the major survey results is set out below.

1. Significant influencers of medical reform:
more than 60% of respondents indicated "VBP" and "MAH" are the most impactful policies for their business, with more than 40% saying the Two Invoice System has had a substantial  impact.

2. Direct financial impact of medical reform:
more than 70% of respondents said price decline has had the main financial impact on their business, with 40% facing cost control pressure as a result of the new policies.

3. Measures adopted by business to cope with medical reform:
nearly 70% of respondents indicated their business have been conducting sales re-channelling to cope with medical reform, with increased investment in R&D and introducing new drugs the second most adopted measure (nearly 60% of respondents. Some 40% of the respondents also indicated that their business has been reorganizing supply chain models.  

4. Imports of products from overseas: 
among companies considering imports of new products to China, there was a quite even split between those pursuing imports of finished goods and imports of semi-finished goods for local production.

5. Major tax challenges for business:
the survey found TP and IP planning are major tax challenges for LS enterprises. This is consistent with the Deloitte's observation that IP is one of the most important assets for LS businesses. 

6. Year-end TP adjustment:
nearly 50% of respondents said they plan to make year-end TP adjustments to manage related risks. Most of the adjustments are being made to in-bound TP, potentially due to the FX control difficulties associated with making outbound TP adjustments in China.

7. Key investment site selection considerations: 
the survey found local financial support and tax incentives are two of the primary considerations for investment site selection, along with considerations about alignment with current supply chains and whether government can provide industry compliance related support. 

Deloitte observations

The survey results accurately reflect businesses' views and response strategies in the context of China's new medical reform and the country's expanding LS market. Deloitte industry tax specialists believe finance and tax professionals in the LS industry should work closely with business partners to proactively map out optimal tax strategies that align with their business model and supply chain optimization initiatives, thereby creating substantial after-tax value.