Biopharmas: Spending too much on trials, tariffs and indirect taxes?

ARTICLE | April 09, 2024

Authored by RSM US LLP

Biopharmaceutical companies contend with high costs when developing potential drug candidates, managing everything from a variety of clinical trial expenses to additional costs on customs tariffs and other indirect taxes such as value-added taxes or goods and services taxes.

Diving deeper into the topic of tariffs and taxes, many biopharmas assume that import tariffs and taxes are an inescapable cost of doing business and forego exploring savings opportunities. The reality is that companies do have options to reduce the cost profiles of their research and development (R&D) materials which can help improve cash flow.

Note the following:

Special tariff provisions

For clinical studies or other sorts of product development activities such as testing, evaluation or quality control taking place in the U.S., special tariff provisions exist to effectively eliminate otherwise applicable customs duties. The cost savings can be substantial when tariff rates of 5%, 10% or even 25% fall to zero. Not only can companies start capitalizing on the savings immediately going forward, they may also be able to recoup previously paid tariffs.

Alternate customs values

In the U.S. and globally, companies can apply other tariff cost-savings strategies such as lowering the declared customs value of the materials. For global clinical trials, companies must pay ad valorem import duties and indirect taxes based on a shipment’s commercial value. Since these investigational materials are not actually sold, it is often difficult to determine an acceptable value. In many instances, companies declare the products at a price point that is higher than necessary which means greater tariff and indirect tax costs. Some customs authorities appreciate that a drug’s per-unit production price should generally decrease once commercialized and fall further during its life cycle. Provided an analysis is performed and documented to defend the chosen method of merchandise appraisement for customs purposes (and supporting financial accounting records are well maintained), there is an opportunity to declare projected costs as the customs value for clinical materials.

Special tariff provisions and alternate customs values are just two tariff and transactional tax-cost reduction strategies for R&D-stage products. Alone, either strategy can help lower landed costs of clinical materials and alleviate some financial pressures in both early-stage and ongoing production activities internationally. Combined, they may give a company a significant and sustained advantage versus the competition through a lower operating cost profile and scalable savings.

Next steps

Biopharma companies should analyze their clinical trials to determine any indirect tax optimization opportunities. This endeavor should consider, at a minimum, the following:

  • Location(s) of clinical trials
  • Projected R&D expenditures over the next one to two years
  • Tariff expenses on imported chemical compounds and clinical materials
  • VAT and indirect tax expenses on imported chemical compounds and clinical materials
  • Supportive customs appraisement analysis and declared import values

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This article was written by Jodi Ader, Mark Ludwig and originally appeared on 2024-04-09.
2022 RSM US LLP. All rights reserved.

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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