Pharma industry faces rising tax burden, PwC says

Mon Nov 30, 2009 7:01pm EST

* Higher tax due to govt clampdowns, new focus on services

* Pharma tax rate has been low and stable for 20 years

LONDON Dec 1 (Reuters) - On top of patent expiries and healthcare reform, drugmakers have something else to worry about -- rising tax bills.

The effective tax rate for the pharmaceutical industry is set to increase as its business model changes and governments take an increasingly tough line on tax-reduction strategies, consultancy PricewaterhouseCoopers (PwC) said on Tuesday.

For the past 20 years Big Pharma has enjoyed a benign legislative and commercial environment that has enabled it to report low and stable tax rates, averaging just 23.8 percent across a sample of 12 global companies monitored by PwC.

GlaxoSmithKline (GSK.L) and Bayer (BAYGn.DE) both had the highest tax rate over the last five years at 29.3 percent, while Novartis (NOVN.VX) and Sanofi-Aventis (SASY.PA) were the lowest on 14.4 and 15.9 percent respectively.

But the sector's current low level of taxation, which is less than is paid by most other industry sectors, now looks set to rise, PwC believes.

The global recession has made tax authorities around the world hungry for new revenue sources and governments are restricting the use of tax havens that allow multinationals, including drug companies, to move profits offshore.

Transfer pricing practices, which are often used to minimise tax liabilities, are receiving increased attention as authorities seek to limit any abuse of intra-company transfers of expenses or profits.

At the same time Big Pharma's shift away from a traditional focus on a handful of blockbuster products to a more service-orientated business model is likely to have significant tax implications.

In future, as personalised medicine gains in importance, drugmakers will be packaging their traditional products alongside services such as diagnostics and patient compliance monitoring.

"Pharmaceutical and life sciences companies could not only face new and higher taxes as a service provider but they will have less ability to allocate profits to lower tax rate locations," PwC said.

Many pharmaceutical executives seemed to agree, with six out of 10 senior tax executives from the drugs industry polled by PwC viewing an increase in the effective tax rate for the sector as inevitable. (Reporting by Ben Hirschler; Editing by Greg Mahlich) ((ben.hirschler@thomsonreuters.com; Tel: +44 20 7542 5082; Reuters Messaging: ben.hirschler.reuters.com@reuters.net; www.twitter.com/reutersBenHir))

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