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Road map to emerging markets: spotting opportunities and issues in health sciences
 

Road map to emerging markets: spotting opportunities and issues in health sciences

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This presentation coveres:
- an overview of emerging markets
- major emerging markets tax trends:
- transfer pricing (TP) under increased scrutiny
- anti-avoidance challenges
- tax administration and practice tightened
- mergers and acquisitions
- other regional developments and opportunities

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    Road map to emerging markets: spotting opportunities and issues in health sciences Road map to emerging markets: spotting opportunities and issues in health sciences Presentation Transcript

    • 22nd Annual Health SciencesTax ConferenceRoad map to emerging markets: spottingopportunities and issues in health sciencesDecember 5, 2012
    • Disclaimer► Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.Page 2 Road map to emerging markets: spotting opportunities and issues in health sciences
    • DisclaimerErnst & Young refers to the global organization of member firms of Ernst & YoungGlobal Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. For moreinformation about our organization, please visit www.ey.com.This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of thisdocument may be reproduced, transmitted or otherwise distributed in any form or byany means, electronic or mechanical, including by photocopying, facsimiletransmission, recording, rekeying, or using any information storage and retrievalsystem, without written permission from Ernst & Young LLP. Any reproduction,transmission or distribution of this form or any of the material herein is prohibited andis in violation of US and international law. Ernst & Young LLP expressly disclaims anyliability in connection with use of this presentation or its contents by any third party.Views expressed in this presentation are not necessarily those of Ernst & Young LLP.Page 3 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Panelists► Haroon Cheema ► Frank de Meijer Director and International Tax Counsel Ernst & Young Terco Merck & Co., Inc. São Paulo, Brazil Whitehouse Station, NJ +55 11 2573 3413 frank-de.meijer@br.ey.com ► Ana Mingramm► Chris Finnerty Ernst & Young LLP Ernst & Young LLP New York, NY New York, NY +1 212 773 9190 +1 212 773 7479 ana.mingramm@ey.com chris.finnerty@ey.com ► Tejas Mody Ernst & Young LLP New York, NY +1 212 773 4496 tejas.mody@ey.comPage 4 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Agenda► Emerging-markets overview► Major emerging-markets tax trends: ► Transfer pricing (TP) under increased scrutiny ► Anti-avoidance challenges ► Tax administration and practice tightened► Mergers and acquisitions► Other regional developments and opportunitiesPage 5 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Emerging-markets overview
    • Emerging-markets overview — faster growththan developed markets Pharmaceutical sales in Pharmaceutical sales in emerging-markets developed markets 450 600 400 500 350 CAGR: 2.00% 300 400 Sales (US$b) Sales (US$b) CAGR: 11.2% 250 300 200 150 200 100 CAGR: 15.6% 100 50 0 0 2007 2008 2013F 2020F 2006 2020F Brazil Russia India China Mexico Turkey Korea EU 5 US Source: IMS Health, July 2012 *Compound annual growth rate (CAGR)Page 7 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Emerging-markets overview — strugglesahead?► Eli Lilly & Co.: emerging market revenue falls 4%► Pfizer Inc.: scales back emerging-markets growth estimates► Ernst & Young LLP: predicts $47 billion shortfall between forecasted sales and achievable sales for “Big Pharma”► Emerging market growth drivers: ► Local competition for products and staff ► Construction of factories to facilitate sales approvals ► Pharmaceutical policy changesTax considerations are becoming increasingly more important for lifesciences companies doing business in the emerging-markets. Source: Wall Street Journal, August 20, 2012Page 8 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Emerging-markets overview — evolving tax landscape 1 ► Transfer pricing audits ► Permanent establishment ► Tax residency ► Beneficial ownership Regular tax Tax scrutiny of ► Specific anti-avoidance rules inspections non-residents Expanded ► General anti- jurisdictions avoidance/substance over form Tightened More Alignment with 3 2 enforcement sophisticated international ► Transfer pricing practices► Taxpayers’ information practices gathering and exchange ► Advance pricing agreements► Tax internal control and ► Exchange of information tax risk profiling agreements► Strengthening of tax Increased Continuous ► Tax-free reorganizations Tax reform administration and collection disclosures change ► International Financial changes► Various transaction disclosure Reporting Standards forms► Limitation of benefits/anti-treaty ► Changes to tax administration and collection shopping clauses in tax treaties ► Evolving guidance 4 ► Renegotiated tax treaties Page 9 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Major emerging-markets tax trends —transfer pricing under increased scrutiny
    • Major emerging-markets tax trends —transfer pricing, Asia-PacificIndia► Increasingly aggressive transfer pricing enforcement► Key industry issues in recent transfer pricing audits concerning: ► Need to satisfy benefits test for management fee payout ► Basis of royalty determination; legal vs economic ownership ► Clinical data management, construed high end, 27% to 30% markup ► Clinical trial coordination, construed high-end research and development, 22% to 25% markup ► Import prices of active pharmaceutical ingredients (APIs)/finished dosage formulations (FDFs) ► Comparable uncontrolled price of generics deployed in audits ► Advertising, marketing and promotion expenses ► Compensation for marketing intangible in IndiaPage 11 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Major emerging-markets tax trends —transfer pricing, Asia-Pacific► Recent legislative changes to transfer pricing provisions: ► Scope of term international transaction enhanced; meaning of term intangible property clarified ► Transfer pricing made applicable to specified domestic transactions ► Procedural and penalty provisions tightened► Recent introduction of advance pricing agreement (APA) rules into India law: ► Alternate route to domestic appellate process ► Provision for unilateral, bilateral or multilateral APAsPage 12 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Major emerging-markets tax trends —transfer pricing, Asia-PacificChina► Rapid growth in transfer pricing audit resources at the local state tax bureau and State Administration of Taxation (SAT) headquarters level► Stricter TP enforcement according to Guoshuihan [2011] Circular 167► Industry focus on automotive, consumer products, pharmaceuticals, real estate, hospitality and logistics► Marketing intangibles and location savings key audit issues► Three-pronged approach to enforcement: ► Administration: change from investigation afterwards to precaution beforehand ► Service: actively promote APAs and mutual agreement procedures ► Investigation: deepen investigation and enhance intensity (industry focus)Page 13 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Major emerging-markets tax trends —transfer pricing, Asia-Pacific APAs ► Increasing use in the region: mainland China, Singapore, Japan, South Korea, Taiwan, Indonesia, Hong Kong and India. Taxpayer benefit Tax authority benefit Certainty of outcome Certainty of tax base Bilateral/multilateral solution — Knowledge-sharing from elimination of risk of double tax bilateral/multilateral negotiations Avoidance of costly, protracted audits More detailed understanding of taxpayer Dedication of more TP technical Alternative approach to TP enforcement resources by tax authorities ► APAs can provide certainty for significant investment decisions, tax structuring and host location analysis.Page 14 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Major emerging-markets tax trends —transfer pricing, Latin AmericaBrazil► Published on April 4, 2012; effective as of 2013 with the option to be applied for 2012► Minimum requirement for the application of the Brazilian uncontrolled price method (PIC)► The minimum statutory gross profit margin required when applying the resale price method (PRL) for the import of goods, services or rights; ranges from 20%–40% depending on the industry► Freight-on-board price as basis for the PRL calculation► Changes to the deductibility of interestPage 15 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Major emerging-markets tax trends —anti-avoidance challenges
    • Major emerging-markets tax trends —anti-avoidance rules, Asia-Pacific► Australia, China, Hong Kong, New Zealand and Singapore have general anti-avoidance rules (GAAR) currently; India is on the way.► India, Indonesia, Japan and South Korea do not have GAAR provisions but rely on targeted anti-abuse rules/specific anti- abuse rules, substance-over-form and other measures, e.g., Limitation of Benefits (LOB)/anti-abuse provisions in tax treaties to prevent treaty shopping.► Tax authorities are focusing more on thin capitalization, transfer pricing and treaty shopping (beneficial ownership).► Permanent establishment as well as tax residency are increasingly audit issues.► Disclosures, documentation and administrative burdens are increasing steadily in the region.Page 17 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Major emerging-markets tax trends —anti-avoidance rules, Asia-PacificIndia► GAAR introduced to counter aggressive tax planning; effective April 1, 2013 ► Deferral to April 1, 2016 recommended► GAAR triggered if main purpose or one of the main purposes is to obtain tax benefit and a tainted element is present► Tainted elements test arm’s-length character, misuse or abuse of law, commercial substance or bonafides of arrangement► Wide powers to tax authority to disregard or re-characterize arrangement if GAAR invoked► Expert Committee (EC) constituted by Prime Minister: release of draft report (ECR) containing guidelines for implementation► Provisions likely to be watered downPage 18 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Major emerging-markets tax trends —anti-avoidance rules, Latin AmericaGeneral trend to adopt substance-over-form approach and requirebusiness purpose:Brazil► New interpretations from the taxpayers’ council in Brazil ► Superior Tribunal de Justica interpretation on payment for imported services; no withholding tax on treaty countriesMexico► Tax authorities criteria and recent case lawPeru► New GAAR (effective July 19, 2012)Colombia ► Proposed anti-evasion rulesPage 19 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Major emerging-markets tax trends — anti-avoidance rules, indirect share transfers
    • Major emerging-markets tax trends —indirect share transfers, Asia-PacificAustralia► Greater than 50% real estate test applies.China► Circular 698: GAAR can be asserted to disregard intermediaries and recast as a direct equity transfer.India► Transfer of shares of foreign company deriving value substantially from India will be taxed in India as law currently stands; many issues remain.► EC recently released draft report of key recommendations.Indonesia► Specific indirect transfer rule targets the use of special- purpose vehicles domiciled in tax havens.Page 21 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Major emerging-markets tax trends —indirect share transfers, Asia-PacificHong Kong, Malaysia, New Zealand, Singapore ► Nonresidents not taxed on capital gains.Cambodia, Japan, South Korea, Philippines, Thailand, Vietnam ► Indirect share transfers currently not taxed.Page 22 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Major emerging-markets tax trends —indirect share transfers, Latin AmericaMexico► 50% real estate testChile► New rules effective as of January 1, 2013Peru► Subject to tax if Peru represents 50% of the value of the shares transferredPanama► Applicable over Panamanian source income onlyPage 23 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Major emerging-markets tax trends —tax administration and practice tightened
    • Major emerging-markets tax trends — taxadministration and practice tightened► Significant activity in tax audits throughout the region► Generally aggressive audits and large assessments► Cross-border transactions and transfer pricing► Pre-controversy management: ► Need to maintain adequate supporting documentation ► Severe penalties and fines imposed by countries in certain countries ► Need for active involvement at the discovery level► Exchange of information agreementsPage 25 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Mergers and acquisitions
    • Mergers and acquisitions — Latin America► Investments and acquisitions ► Made through favorable jurisdictions (Netherlands, Spain, Switzerland) ► Leverage strategies available in most jurisdictions ► Goodwill amortization variable among countries (Brazil, Chile)► Divestments and exit planning ► Capital gains tax on sale of shares: ► Book value possible in limited countries ► Use of tax treaties to limit capital gains tax► Reorganizations ► Mergers usually tax free ► Tax free spin-offs (de-mergers) generally possible with few exemptions (Venezuela, Central America, Uruguay) ► Holding period requirement ► Mexico, Argentina, Peru and proposed changes in ColombiaPage 27 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Mergers and acquisitions — Asia-Pacific,India ► Planning inbound structure: Mergers and ► Comply with Indian acquisitions regulations/laws ► Structured through tax- efficient jurisdictions Business Acquisitions ► Hybrid financing possible reorganizations but requires structuring ► Tax diligence necessary Share Merger Demerger Asset purchase purchase ► Generally tax neutral subject to conditions Slump Itemized sale sale ► Indian acquiring vehicle can be a corporate or a limited liability partnership ► Possible to claim goodwill amortization ► Sell side tax costs and transaction costs to be analyzedPage 28 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Other regional developments andopportunities — Latin America
    • Other regional developments andopportunities — Latin America► Significant tax reforms throughout the region ► Argentina ► Significant changes to foreign-exchange controls ► Proposed tax reform for 2013 ► Chile ► Tax reform enacted in 2012 ► Peru ► Tax reform enacted in 2012 ► Colombia ► Proposed tax reform for 2013► Active increase in tax treaties throughout the regionPage 30 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Other regional developments andopportunities — Latin America► Shared service centers and management fees ► Reduction of withholding taxes ► TreatyCo with Panama Branch ► Use of foreign tax credits ► Shared service centers in Mexico or Brazil► Supply chain opportunities ► Expanding treaty network ► Free trade zones in the regionPage 31 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Other regional developments andopportunities — Brazil indirect taxes (ICMS)► Senate Resolution 13 introduced► By 2013, Interstate ICMS value added tax (VAT) rate at 4% for imported goods► 2012 rate at 7% or 12%► Reason: use of import state incentives avoided► Result: ► Huge buildup of ICMS credits in Brazil ► Use of incentives less attractive ► Rising tax costs► New supply chain planning needed► Same rules applicable to locally manufactured goods by 2020Page 32 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Other regional developments and opportunities —Brazil localization for medical equipment► High demand for medical equipment in Brazil► Customs duties low; no local production yet► Initiatives for local production begun► High financing costs for users► Alternative: use of Finame for locally produced equipment► Bidding process of public hospitals: locally manufactured equipment preferred even when cost margin is higher (up to 25%)Page 33 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Other regional developments and opportunities —Brazil indirect tax distribution planningCreate own distribution center to save on turn-over tax (PIS/Cofins)and substitute state VAT (ICMS) Factory Distributor Consumer ► Low factory price ► Basis for manufacturing taxes: ► Single turn-over tax (PIS/Cofins) ► Advanced ICMS (ST) ► High commercial price ► Manufacturing taxes no longer duePage 34 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Other regional developments andopportunities — future trends in trade Blocs► Mercosul, CAN and others► Trend towards protectionism in recent years ► Mercosur maximum external tariff to 35%► Mercosur trade Bloc appearing continually weaker: ► Fractious relationships between the parties ► Impact on Venezuela’s admission► Mercosur opposed to entering FTA relationships with US► US looking for more bilateral agreements► Mercosur not successful: ► Little growth in export trade between the member states ► Disputes between Argentina and Brazil► Economic momentum of both Mercosur and CAN slowed► Truly integrated South America Trade area unlikely in next 5 to 10 yearsPage 35 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Other regional developments andopportunities — Asia-Pacific
    • Other regional developments andopportunities — indirect taxes, India► Paradigm shift in taxation of services: all services taxable except negative/exempt list► Exemption to export services based on newly introduced place- of-provision-of-services rules ► Seeming impact on technical testing/clinical trial services► Cumbersome refund process for exporters of goods and services► Import prices of APIs/FDFs subject to investigation by special valuation branch of India’s Central Board of Excise and CustomsPage 37 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Other regional developments andopportunities — indirect taxes, China► VAT pilot locations and covered industries ► Pilot locations: Shanghai, Beijing, Anhui, Jiangsu, Region Launch date Fujian, Guangdong (includes Shēnzhèn), Shanghai January 1, 2012 Tianjin and Hubei Beijing September 1, 2012 ► Pilot services: Anhui and Jiangsu October 1, 2012 ► Transport service ► Certain modern Fujian and Guangdong November 1, 2012 services industries (includes Shēnzhèn) ► Applicable rates: Tianjin, Zhejiang and December 1, 2012 17%,11%, 6% and 3%, Hubei depending on different classes of VAT payers of the VAT pilot servicePage 38 Road map to emerging markets: spotting opportunities and issues in health sciences
    • Questions?Page 39 Road map to emerging markets: spotting opportunities and issues in health sciences