RSM transfer pricing professionals highlight recent developments and planning opportunities for life sciences companies and the impact Biden administration and OECD proposals may have going forward.
Emma Sweeny (ES): Hi, I'm here with Richard Cooper today, a leader of RSM’s Northeast transfer pricing practice, who is going to give us an overview of transfer pricing recent developments and planning opportunities for clients in the life sciences industry. Richard, would you like to start by giving us a brief overview of the transfer pricing concerns in the life sciences industry?
Richard Cooper (RC): Absolutely, thanks Emma, pleasure to be here. Transfer pricing is a really important area for many life sciences companies, and certainly we see it with our life sciences clients. If you think about transfer pricing, one of the key value drivers is intellectual property and patents. So where a company's intellectual property is housed has a huge impact on where they are taxed.
The other important driver with life sciences companies is that they have a lot longer life cycle than many other industries, with a long startup period of losses, and then potential excess profits after that—which again means there is a transfer pricing impact on where those losses are born. Are they born in the right country? Are they shared between more than one entity? When the company gets into a profitable position, how was transfer pricing used in relation to those losses or not? Can you use transfer pricing effectively to utilize those losses?
The other thing we see with life sciences clients is many of them are looking to expand internationally. Life sciences companies often have an offering or products that are very transferable across geographies, subject to local regulations of course. Many companies are looking to expand into new markets, to utilize talent, in different geographies as well, so transfer pricing has a huge role to play in the industry.
ES: That is a great point you've made. Speaking about the ways we should be looking at transfer pricing, can you talk a bit about recent developments that have affected this industry?
RC: It's a very interesting time for multinational companies thinking about potential tax changes that are coming here in the United States. The Biden administration has released its proposals for increasing the corporate rate, which essentially is going to mean a higher tax burden for many corporates.
Interestingly—just a little bit of history here—before 2017 many life sciences companies tried to have their intellectual property offshore outside of the United States. The United States had a very high rate, at 35%, and many companies could defer taxation by housing their intellectual property in a lower tax jurisdiction. Tax reform in 2017 (TCJA) under the Trump administration, did bring the United States much closer to other countries in terms of the corporate tax rate. And I think it made the United States a better location for housing intellectual property. With a potential increase in the corporate rate, and changes to things like foreign-derived intangible income (FDII), it's going to be interesting to see what companies do with their intellectual property going forward. A lot of companies will have to think about whether the United States is the right location for that. Or are you better served going overseas?
The Biden administration has also proposed a minimum tax rate, so even if you were to move your IP to a lower tax jurisdiction, would it be captured anyway? There are many different variables there. What we see with a lot of life sciences companies in particular is they house their international headquarters in a tax efficient jurisdiction, such as Ireland or the Netherlands, or the United Kingdom. It's going to be interesting to see what those countries do, in relation to U.S. developments, as well as the OECD.
The OECD is looking at proposals, primarily for digital tax and technology companies, but I think that will have a knock-on effect for other industries such as life sciences companies. They are coming out with proposals by the middle of this year. There are a lot of different factors coming into play life sciences companies need to be paying attention to during 2021.
ES: Would you quickly talk about some of these planning opportunities that you mentioned? I know you mentioned some net operating losses (NOLs) and how to utilize those effectively.
RC: NOLs are a big thing. They are a natural tax shelter. If you have NOLs in a business that is now profitable, can you maximize the income in that jurisdiction with the NOLs to really minimize your tax burden? At the same time, it makes sense to look for lower tax rates.
I mentioned Ireland earlier at a 12.5% tax rate, and a lot of countries have incentives for research and development (R&D). We've worked with clients in Australia where they have a very good refundable R&D program; companies in the contract research organization space, often try to take advantage of that. But Australia is not the only one. We see countries such as France, the United Kingdom, Norway, a lot of Scandinavian countries, have tax incentives related to R&D.
It is important to think about all those different interactions—there are definitely opportunities there—to minimize your tax burden. Nowadays it takes a lot of careful planning, and you need to think about the substance following the BEPS (base erosion and profit shifting) project under the OECD. You need to think about the substance you have in place and getting the right tax framework around that. There are still definitely opportunities for effective tax planning and certainly, that is where we try to help our clients as they navigate all of these changing international tax rules.
ES: That's wonderful. You have certainly given me a lot to think about. At our next date we can discuss other opportunities that exist in the life sciences industry and how we can better serve clients with specific needs. Thank you for your time.