Posted: 09 Jun. 2020 10 min. read

How are life sciences companies considering transfer pricing as they recover from the pandemic?

By Nicola Lostumbo, principal, and Maggie Zellers, partner, Deloitte Tax LLP

The global COVID-19 pandemic has disrupted supply chains and impacted demand for therapies manufactured and sold by life sciences companies. The pandemic has also created a new layer of tax challenges for multinational companies. Many pharmaceutical and medical-device manufacturers have transfer pricing policies for the goods and services they produce and sell around the globe. In order to respond to the pandemic, recover from its effects, and prepare to thrive in the future, these organizations should consider revisiting those policies to determine how their company and affiliates may be affected.

Income tax regulations in many countries require that companies document transfer prices for goods and services provided across international borders. For example, a pharmaceutical company typically would be required to justify and document its intercompany pricing policies related to the products it manufactures and ships from, say, its US affiliate to its related Italian affiliate. In this example, for income tax purposes, the intercompany sale of products at the established transfer price is reported as revenue for the US affiliate while the Italian affiliate reports the transaction as the purchase of inventory, which will reduce profits when the inventory is subsequently sold. In this way, such intercompany transactions may have an impact on the level of reported income and accordingly on the income tax liabilities of the company in the tax jurisdictions in which it does business, based on the often complex domestic income tax regimes around the world.

The novel coronavirus, known as SARS-CoV-2, and the COVID-19 pandemic it has unleashed on the world have introduced a new level of uncertainty into the global economy. But the impact of the pandemic has not been felt uniformly across countries and industries. Many companies in the life sciences sector have been on the front lines in the fight against the global pandemic and have accordingly seen the demand for some of their products and services surge dramatically. For example, some pharmaceutical manufacturers have seen high demand for certain prescription drugs, while other companies are working around the clock to develop therapies to treat COVID-19 and/or vaccines to prevent it. Some medical device companies have experienced increased demand for products such as ventilators and diagnostic testing equipment and supplies. Conversely, other industry participants have been negatively affected by supply chain disruptions, delayed regulatory responses/approvals, and slowdowns for some patient procedures (e.g., non-emergency surgeries and infusion therapies). Thus, given the continued uncertainty surrounding the trajectory of the global pandemic and its likely differential impact across the life sciences industry, the review of intercompany transfer pricing policies is likely to be a complex undertaking. 

Transfer pricing in a COVID-19 world

A robust transfer pricing analysis that takes into account COVID-19 will likely include a specifically tailored approach, depending on the evolving facts and circumstances unique to each industry segment and indeed each individual company. As national governments and taxing authorities find it difficult to deal with the looming fiscal impact of the pandemic, there is likely to be increased scrutiny of intercompany transfer pricing.

Even in pre-COVID-19 times, intercompany transfer pricing policies of multinational companies operating in the life sciences industry have often been a source of income tax controversy in many jurisdictions around the world. The regulatory frameworks in most tax jurisdictions that govern the setting of intercompany transfer pricing rely heavily on the concept of “arm’s length pricing,” which is based on the idea that intercompany pricing should mirror or be “comparable” with the pricing evidenced in transactions that occur among unrelated parties. The COVID-19 pandemic has introduced a new set of comparability factors, including the degree of company resilience. At this point in time, it remains unclear how these new factors are likely to affect specific transfer pricing policies and/or regulatory guidance; however, it is reasonable to expect that they may tend to outweigh other more traditional considerations for the remainder of 2020 and potentially for some time to come. 

Given the rapidly changing landscape—and the impact the pandemic exerts on a company’s transfer pricing analyses—life sciences companies may want to consider taking certain prudent and protective steps sooner rather than later. One such consideration may include the adoption of a group-wide memorandum of understanding (MOU) that would document the intention on the part of company policymakers to consider and potentially implement changes to its current transfer pricing policies, depending on certain anticipated outcomes. For example, such transfer pricing policy changes might include new outbound service charges for risk mitigation and/or pandemic management performed by corporate headquarters or other regional headquarters affiliates within the global group. Other considerations might include revisions to intercompany arrangements that have traditionally sought to limit the level of risk of certain controlled entities within integrated supply chains to allow for the possibility of a different distribution of risk and accordingly income or losses across a group of related companies.

COVID-19’s impact on intangible property transfer pricing

Structuring the funding and development efforts for intellectual property (IP) during the pandemic may also present some unique challenges. IP in life sciences typically consists of patents, trademarks, trade names, and copyrights, as well as certain unprotected trade secrets and know-how. Indeed, for many companies in the life sciences industry, IP is often seen as the principal value driver of the organization. 

Because the value of IP is often highly dependent on the outlook for products and services that are heavily reliant on such IP, changes in market conditions may have an outsized effect on transfer pricing policies related to the development and exploitation of IP. For example, IP for adversely affected therapeutic areas, such as non-emergency therapies that can only be performed at hospitals, are likely to be less valuable in the current environment due to the likely reduced expected demand over the short to medium term. This potentially significant change in IP value may require a reevaluation of existing IP planning structures. On the other hand, some companies and governments are accelerating the development of COVID-19-related IP (e.g., vaccines). This IP, which could become valuable in the short term, might require the immediate attention of company tax managers.

Throughout history, individuals have shown their resilience. Companies at their core are collections of individuals with a common purpose dedicated to achieving common goals. With COVID-19, companies in the life sciences sector are helping lead the charge for society to respond to the current pandemic, recover from its effects, and are well positioned to persevere and thrive in the future.

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Maggie Zellers

Maggie Zellers

US Life Sciences Tax Leader | Deloitte Tax LLP

Maggie, managing partner of Deloitte Tax’s Life Sciences practice, has more than 20 years of experience providing corporate tax compliance and consulting services, including extensive experience in providing services to public companies and clients with multinational operations. This includes experience with global financial tax accounting, financial reporting, and process optimization. She also led teams that have assisted tax departments in the transformation of their global operations.