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| home > epc > winter 2002 > managing tax payment - how to avoid paying tax at 60 per cent or more |
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European Pharmaceutical Contractor
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A significant cost incurred by pharmaceutical companies is tax. While most companies are prepared to pay tax of around 30 to 40 per cent of profits, depending on the tax rates of the countries in which they operate, some are facing tax bills at double that rate. This is because the same profits are being taxed in more than one country. Such double taxation is a risk facing all pharmaceutical companies engaged in cross-border transactions with affiliates. However, it is a risk that can be managed and eliminated. This article looks in greater detail at the risk of double taxation and how that risk can be managed.
The risk of double taxation arises for pharmaceutical companies because:
1. There is a wide variation in pricing possible in the industry
2. There is scope for tax administrations to take diverging views about pricing
That scope exists even though there is wide agreement that tax administrations and multinationals should apply the arm's length principle when determining the pricing of transactions between affiliated companies. In other words, the pricing between members of a multinational group should be equivalent to the pricing that would have been charged had the parties not been connected (1). The risk of double taxation arises because it is often difficult to determine what the arm's length pricing would have been.
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By Andrew Hickman, European Regional Co-ordinator, and Emma Cuthbertson, Senior Manager in KPMG's London-based Global Transfer Pricing Services Group
Andrew Hickman joined KPMG's Global Transfer Pricing Services practice two years ago and acts as European Regional Co-ordinator for KPMG's Global Transfer Pricing Resolution Network. Andrew has successfully defended clients undergoing transfer pricing enquiries in Europe and has obtained competent authority agreements and advance pricing agreements for clients across a range of business sectors, including pharmaceutical engineering, electronics and financial.
Before joining KPMG Andrew was a Senior Official in the UK Inland Revenue, acted as the UK's competent authority, was responsible for introducing and managing the UK's Inland Revenue Advance Pricing Agreements programme, and was the UK delegate at OECD during production of the Transfer Pricing Guidelines.
Emma Cuthbertson is a Senior Manager in KPMG's Global Transfer Pricing Services group in London. She has managed a wide range of projects covering many aspects of international transfer pricing and has experience of the following industries: pharmaceuticals, computer entertainment, logistics/distribution and management services. One of her principal focuses has been to support KPMG London's Japanese clients with their transfer pricing, audits and APAs. Emma joined KPMG London in March 1997 and spent her first three months working in KPMG's Transfer Pricing group in the US, focusing on economic comparable work. She also spent January to July 2002 working in KPMG's Transfer Pricing group in the firm's Tokyo office.
For further information about KPMG's Global Transfer Pricing Services or our service offerings, please visit our Web site at kpmg.com or e-Mail us at transferpricing@kpmg.com
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