Last month, on April 4, 2012, the Institute of Medicine (IOM) issued a report titled “Ensuring Safe Foods and Medical Products Through Stronger Regulatory Systems Abroad.” The report recommends 13 steps that the U.S. Food & Drug Administration (FDA) and other organizations can take over the next few years to bolster product safety systems around the globe. See our prior discussion of related topics here and here.
Of interest to medical device companies in Spanish-speaking countries, on June 8, 2011, FDA made its instructions on device establishment registration and device listing available in Spanish. The information is available here.
Recently, a large pharmaceutical company agreed to pay the US Internal Revenue Service (IRS) USD $1.1 Billion to settle two long running tax disputes.
The main reason for the dispute was a disagreement between the company on the one hand, and the US IRS and UK equivalent HM Revenue & Customs (HMRC) on the other, about the inter-company pricing arrangements used over a number of years. Basically, the US IRS argued that the company should have allocated more taxable income to the US.
Just a couple of years ago, another large pharmaceutical company settled a similar transfer pricing dispute (again with the US IRS and UK HMRC), agreeing to pay the IRS USD $3.4 Billion. This was the largest transfer pricing settlement to date in the world. The IRS originally sought an amount almost 6 times higher.
There are similar disputes ongoing, for similar reasons and with similar amounts at stake, between the IRS and other large pharmaceutical and medical device companies.
Is it a coincidence that large players in the life sciences sector have received so many of these multibillion dollar hits in recent years?
Since January 1, 2011, the Netherlands has put in place a set of tax incentives that can benefit pharmaceutical and life sciences companies, among others. These incentives are referred to as “the innovation box.”
These incentives were initially introduced in 2007, but were broadened in 2010, and again in 2011. As a result of these amendments, the incentives cover a broader group of companies and situations.
Now pharmaceutical and life science companies can benefit from this incentive.
The incentives allow for qualifying profits to have an effective tax rate of 5% instead of the general tax rate of 25.5%. Key features of the incentives are as follows:
- The incentives apply to certain self-developed intangibles and the qualifying income generated from them.
- Brands, trademarks and logos are not qualifying intangibles.
- Technology-related, self-developed intangibles like new product developments, new production processes, new formulas, and the like, qualify whether or not they have patent protection.
- It is not necessary for the company to report these intangibles in its financial statements.
- The intangibles must, however, contribute at least 30% of the total profits realized from those intangibles.
- The intangibles can be developed in cooperation with other companies (for example contract R&D or cost sharing arrangements) as long as the Dutch company applying for the tax incentive is the legal owner of the intangibles.
- The incentive does not apply to intangibles acquired, with some exceptions.
- The incentive is optional and can be applied on a product-by-product basis.
To avoid companies deducting expenses at the statutory rate of 25.5% while corresponding profits are only taxed at 5%, there is a threshold. The effective tax rate of 5% applies only to the extent that the profits exceed the total development costs of the intangible asset at issue. This requires allocating income and expenses. These allocations need to be substantiated, usually with a transfer pricing study.
It is common practice for a company to discuss with the Dutch Tax Authorities (DTA) how the rules apply to each particular case. It is also possible to enter into a binding agreement with the DTA on the details of the practical application of the rules. These binding agreements make the incentive specific to a particular company and provide for certainty of common understanding.
Please feel free to contact one of our tax specialists in the Netherlands to discuss how the innovation box could apply to your company.
DLA Piper is open for business in Australia as of May 2nd, following the integration of DLA Phillips Fox (Australia) and DLA Piper on May 1st. The integration of experienced and highly regarded Australian lawyers to the DLA Piper global network enhances the firm's capacity and ability to provide local, in-depth knowledge on an international scale.
DLA Piper in Australia is a full service business law firm, able to provide clients with an extensive breadth and depth of service across five capital cities nationally, and 11 offices throughout Asia-Pacific.
Our colleagues in Australia regularly publish "Health Alert," which is a weekly summary of critical judgments, legislation, press releases and news items of interest to those in the Health Care sector.
Read the May 3rd Health Alert here.
You’ve done your homework on regulatory requirements and compliance. You’ve hired “tutors,” such as consultants and legal counsel, to educate your personnel. You have a product with marketing authorization in the US. Your marketing team is moving at warp speed. Your overseas contract manufacturer has sent the first shipment. Your sales force is champing at the bit.
As far as you’re concerned, you are ready for the final test.
One problem: Your logistics personnel just got a “Notice of FDA Action.” FDA has placed a “hold” on your shipment coming across the border. The next thing you know, your product is “detained.”
You are in detention.
You can’t sell your product in the United States unless you convince an FDA Compliance Officer that your product is, in fact, compliant; or reach an agreement to make the product meet FDA’s view of compliance.
Unless you succeed in one of these approaches, the Compliance Officer tells you he will “refuse admission”; then you will have 90 days to re-export your stock or destroy it.
What is an importer to do?