Life sciences supply chain considerations in the wake of the pandemic

Areas of importance include global indirect taxes, trade and tariffs

May 03, 2020
Life sciences
Management consulting Supply chain Supply chain & operations COVID-19

The coronavirus pandemic has hobbled the global life sciences supply chain, disrupting sales and manufacturing operations and delaying clinical trials. Value-added tax returns and customs declarations already reflect this disruption. While it is impossible to predict what the future holds, the current environment indicates that global indirect taxes, trade and tariffs are emerging areas of importance for life sciences companies to consider.

While clients and advisers navigate the daily flow of global VAT reliefs, trade restrictions and tariff adjustments to support businesses in the immediate term, discussions are now beginning to shift toward considering the potential longer-term legacy of the COVID-19 pandemic. Here is a broad overview of how life sciences companies can prepare for the future with respect to these global supply chain issues.

Immediate reliefs

Tax authorities worldwide have announced efforts to provide companies relief, ranging from deferring tax payment deadlines to reducing VAT rates and customs duties on some medical items. Life sciences businesses should take advantage of all cash-flow incentives made available right now with regard to deferring VAT payments. However, import VAT and customs duties are still payable when goods are imported into a VAT territory, so companies should closely monitor such VAT amounts and seek to recover these as quickly as possible (e.g., 13th Directive refund claims in the European Union). Other options for potential relief include:

  • Submitting repayment VAT returns as soon as possible
  • Consider applying for EU VAT refunds early
  • VAT repayment businesses should consider shifting to monthly returns to expedite refunds
  • Applying for deferment accounts/customs warehousing
  • Considering accruals for VAT on purchase invoices dated in a period but processed after that period
  • Possible renegotiation of payment schedules to ensure VAT is not overpaid, where VAT payments are made on account and there has been a decrease in revenue

Globalized-‘lite’ supply chains

The COVID-19 pandemic has highlighted the sensitivity of any sudden shock to complex and globalized supply chains, prompting reflection on whether lowest-cost sourcing and thin inventories are the best strategies, particularly for the most critical products and materials. As life sciences companies look ahead, there will be an increased focus on alternative suppliers, higher safety stocks and disaster recovery planning as they rethink business continuity and build resiliency to help manage any similar future disruption. Companies should carefully consider the adjustment or evolution of any existing international supply chain from both a VAT and customs perspective. A shift to locate more production and distribution capabilities closer to key markets and end consumers is also expected. Exiting or entering new territories will generate new VAT and tariff implications, and it is essential that life sciences businesses identify the most efficient methods to move forward.

A reduced reliance on China for critical-to-life items

Further to the globalization angle, life sciences businesses should consider what a reduction in dependency on China for manufacturing may look like for them. Social and political pressures will likely be more present in the life sciences industry for life-critical active pharmaceutical ingredients (APIs) and much-publicized shortages of personal protective equipment (PPE).

From a U.S. perspective, a reduced reliance on China could result in tax reliefs to repatriate life sciences manufacturing to the United States or another country, additional tariffs on a broader range of Chinese-origin goods, or the imposition of nontariff barriers such as quotas, licenses and content requirements on the same.

Deferment of clinical trials and elective surgeries

Globally, there was a 75% decline in the average number of new patients entering clinical trials per study site year over year in the first two weeks of April compared to the same time frame last year, according to an analysis from life sciences technology company Medidata. The United States saw an 80% drop during that time frame, the company found. 

Medical device company Medtronic started to see the pandemic’s impact on revenue in mid-March, the company said in April. As surgical procedures have declined in recent weeks, Medtronic’s U.S. weekly revenue “has declined approximately 60% year-over-year on average,” the company said. Deferment of these activities is immediately visible when viewing revenues reported in VAT returns, particularly for medical device and equipment companies. 

As an eventual recovery is expected to play out in the months ahead, the return of these procedures and clinical trials will likely lead to a surge in the sales and movement of goods, and the resulting revenues. Those companies leveraging the present to actively plan for a vastly different future will be best positioned to effectively manage the new VAT and tariff realities that lie ahead.

RSM contributors

  • Mark Ludwig
    Mark Ludwig
    National Trade Services Leader
  • Simon Kelly
    Regional VAT Leader