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Hear the recent developments within the indirect tax arena, focusing on employment, sales and use and property taxes.
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22nd Annual Health Sciences Tax Conference Above the line state and local considerations: why should you care? December 4, 2012
Above the line state and local considerations: why should you care? Page 2
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.
Above the line state and local considerations: why should you care? Page 3
Disclaimer
Ernst & Young refers to the global organization of member firms of Ernst & Young Global 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 more information about our organization, please visit www.ey.com.
This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability 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.
Above the line state and local considerations: why should you care? Page 4
Presenters
► Steve Rauch Global Tax – Indirect Tax and Incentives Pfizer, Inc. [email protected]
► Ed Grimes Director of Tax Cordis Corporation [email protected]
► Michele Raber Ernst & Young LLP Iselin, NJ +1 732 516 4786 [email protected]
► Rebecca Truelove Ernst & Young LLP
New York, NY +1 212 773 8028
► Jennie DeVincenzo Ernst & Young LLP
Iselin, NJ +1 732 516 4572 [email protected]
Above the line state and local considerations: why should you care? Page 5
Today’s agenda
► Overview ► Employment tax ► Property tax ► Sales and use tax ► Credits and incentives
Overview
Above the line state and local considerations: why should you care? Page 7
Ernst & Young LLP/COST FY 2011 50-state business tax study
► Ernst & Young LLP’s 10th annual study of total state and local business taxes, produced in conjunction with the Council on State Taxation (COST): ► Examines business tax trends and provides estimates of the level
of business taxes in each state, including indirect taxes and local taxes
► Provides insights to frame state business tax reform discussions ► Provides the only comprehensive estimate of total state and local
taxes paid by business
Above the line state and local considerations: why should you care? Page 8
The big picture Composition of total state and local business taxes, FY 2011
38.0%
20.1%
12.6%
7.2%
6.4%
5.6%
10.0%
Taxes on business property
Sales tax on business inputs
Excise, utility and insurance taxes
Corporate income tax
Unemployment insurance tax
Individual income tax on business income
Business license and other Note: figures may not sum due to rounding. Source: Ernst & Young LLP estimates based on data from the U.S. Census Bureau, state and local government finances.
Above the line state and local considerations: why should you care? Page 9
How much state and local tax did business pay in FY 2011?
Business tax FY 2010 (US$b)
FY 2011 (US$b)
2011 % total
taxes
One-year
change Business property taxes $248.6 $244.9 38.0% -1.5% Sales taxes on business inputs 123.3 129.7 20.1 5.2 Corporate income tax 42.7 46.3 7.2 8.5 Unemployment insurance 32.4 41.2 6.4 27.1 Business and corporate license 37.0 37.3 5.8 0.9 Individual income tax on passthru 33.0 36.3 5.6 10.0 Excise taxes 30.5 35.0 5.4 14.9 Public utility taxes 28.9 28.8 4.5 -0.3 Insurance premiums taxes 16.6 17.2 2.7 3.6 Severance taxes 11.3 14.8 2.3 30.9 Total business taxes $616.0 $643.9 100.0% 4.5%
Total state and local business taxes, FY 2011
Note: Figures may not sum due to rounding.
Above the line state and local considerations: why should you care? Page 10
State unemployment insurance (UI) trust fund debts still significant
► Many states still face enormous UI trust fund debts.
► 10 states account for 80% of the debts; California accounts for 30%.
► North Carolina and Indiana have the largest debts relative to the size of their current business taxes.
► States are responding by increasing UI contribution rates and taxable wage bases.
► If these debts were paid off in the next year through UI or other business tax increases, total business taxes would rise by more than 10% in CA, PA, NC, IN and KY.
State
UI debt as of June
2012 (US$b)
% of FY11 business
tax California $8.8 10% New York 2.8 4 Pennsylvania 2.5 10 North Carolina 2.5 19 Ohio 1.8 9 Indiana 1.7 17 Illinois 1.1 4 New Jersey 1.0 5 Kentucky 1.0 14 Wisconsin 0.9 9 Other states 5.1 1 Total $29.3 5%
Note: Figures may not sum due to rounding.
Above the line state and local considerations: why should you care? Page 11
2012 state budget surpluses
National Council of State Legislatures, Morgan Stanley Smith Barney, Ernst & Young LLP
AK
RI
VT
NY
NJ
DC
DE
WV
SC
OH
KY
IN
MI WI
VA
TN
AL MS
TX
OK
IA
MN
ND
SD
NE
NM AZ
CO
WY
MT
OR
ID
HI
WY
States with projected 2012 unobligated balances
Above the line state and local considerations: why should you care? Page 12
What’s trending in 2012?
► Legislative and administrative trends in 2012: ► Affiliate sales/use tax nexus ► Credits for hiring unemployed veterans ► Creating, extending, expanding credits for job creation, investment
and research and development (R&D) ► Increased focus on taxing nonresidents ► Increased discussions around tax reform
Employment tax
Above the line state and local considerations: why should you care? Page 14
Form W-2 reporting of health benefits
► Effective in tax year 2012, employers are required to report the value of employer-sponsored health insurance on Form W-2. ► Box 12, code DD is used for this purpose.
► The requirement to report employer-sponsored group health plan coverage costs is informational only. ► Costs reported are not included in employees’ taxable income (for now).
► Until the issuance of further guidance, an employer is not subject to the reporting requirement for a calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year.
Above the line state and local considerations: why should you care? Page 15
Form W-2 reporting of health benefits
► An employer may apply any reasonable method of reporting the cost of coverage for an employee who terminated employment during the calendar year, so long as the method is used consistently for all employees covered under the plan.
► If an individual transfers to a new successor employer, generally both the predecessor and successor employers must report the employer-sponsored group health plan coverage that each provided, unless the successor reports using the alternate procedure (Revenue Procedure 2004-53).
► Only the cost of “applicable employer-sponsored coverage” is required to be reported. ► Coverage that is includable in income is still reportable as employer-
sponsored coverage, which would include, for example, coverage provided by an employer to an employee’s non-dependent partner and the partner’s children.
Above the line state and local considerations: why should you care? Page 16
Form W-2 reporting of health benefits
► These are not included in the reporting requirement: ► Any Archer medical savings account (MSA) or health savings account (HSA) ► Long-term care ► Accident or disability income coverage ► Supplemental liability insurance ► Automobile liability insurance ► Workers’ compensation ► Automobile medical coverage ► Credit insurance ► Coverage for only a specified disease or hospital indemnity ► Any coverage under a multi-employer plan ► Any coverage under a Health Reimbursement Arrangement (HRA) ► Any self-insured group health plan that is not subject to any federal continuation coverage
requirements (the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)) ► Employee’s pre-tax contributions to a flexible spending arrangement ► Employer “flex credits” in a flexible spending account (FSA) are reportable; the exclusion
applies only to employee pre-tax deferrals
Above the line state and local considerations: why should you care? Page 17
Form W-2 reporting of health benefits
► There are three methods for calculating the reportable cost: ► The COBRA-applicable premium method ► The premium-charged method ► A modified COBRA premium method
► An employer that subsidizes the cost of coverage or that determines the cost of coverage for a year by applying the cost of coverage in a prior year may calculate the reportable cost using this method.
► A special rule applies for employers that charge employees a composite rate (the same premium for different types of coverage under a plan)
Changes to note for 2013
Above the line state and local considerations: why should you care? Page 19
Social Security tax to increase in 2013
► The employee withholding rate of 4.2% is set to return to 6.2% in 2013. ► The employer rate will remain at 6.2%.
► The Social Security Administration estimates that the wage base will increase from US$110,100 to US$113,700. ► The estimated annual maximum employee tax will increase by
US$2,425.20 (US$4,624.20 vs US$7,049.40) .
► The federal income tax rates are also set to automatically increase in 2013.
Above the line state and local considerations: why should you care? Page 20
Medicare tax to increase in 2013
► Effective in 2013, employers are required to withhold an additional Medicare tax of 0.9% on wages in excess of US$200,000 for all employees, regardless of marital status. ► There is no matching employer contribution, and employees are required to
pay the additional tax based on a threshold of income and their filing status. ► Taxpayers with combined income in excess of US$250,000 pay the
remaining Medicare tax on their federal Form 1040. ► The additional Medicare tax is not separately reported on Form W-2. ► Form 941 will include a separate line for additional Medicare tax.
► Also effective in 2013, investment income is subject to Medicare tax. ► A number of employees may need to revise their Form W-4 in 2013 to take
into account this additional tax.
Above the line state and local considerations: why should you care? Page 21
Limit on flexible spending accounts
► Effective in 2013, to be qualified under a cafeteria plan, an employee’s health flexible spending account contributions cannot exceed US$2,500 per year (with the annual amount indexed each year thereafter for inflation).
Expiring provisions — time is running out
Above the line state and local considerations: why should you care? Page 23
Extender legislation hopefuls in 2012
Provision Description Expiration date Undergraduate and graduate-level education assistance
Exclusion of up to US$5,250 per year
December 31, 2012
Adoption assistance Effective in 2012, exclude up to US$12,170 per year indexed for inflation
December 31, 2012
Work Opportunity Tax Credit (WOTC)
Other than certain veterans groups
December 31, 2012
Mass transit benefits Renew or reinstate the parity between parking and transit benefits
December 31, 2012
Expense tax credit for employer child-care assistance
A credit of up to US$150,000 for acquiring, constructing, refurbishing or expanding a child-care facility
December 31, 2012
Bush-era tax rate reductions The tax rates are set to automatically increase in 2013 to 28%, 31%, 36% and 39.6% (currently 25%, 28%, 33% and 35%, respectively)
December 31, 2012
Above the line state and local considerations: why should you care? Page 24
Impact of 2013 income tax increases
► If the Bush-era federal income tax rates are allowed to lapse: ► The federal supplemental withholding rate would increase from
25% to 28%. ► The federal flat-tax rate for supplemental wages in excess of US$1
million would increase from 35% to 39.6%. ► Employer gross-up costs would significantly increase. ► Internal Revenue Service (IRS) liability assessments for failure to
withhold federal income tax would significantly increase.
Above the line state and local considerations: why should you care? Page 25
In the face of uncertainty . . .
► Be certain to make educational reimbursements in 2012 ► Payments that fall into 2013 could be fully taxable (because the
US$5,250 would no longer apply).
► Continue to certify WOTC-eligible employees with the state employment agency ► A retroactive reinstatement to January 1, 2012 is still likely and will
apply only to employees properly certified.
► Continue to monitor developments and expect last-minute Congressional action
Property tax
Above the line state and local considerations: why should you care? Page 27
Property tax issues
► Three major issues impacting property taxes: ► Classification — assets are classified in the most advantageous
category, consistent with state law ► Real vs personal property ► Taxable vs exempt ► Abatements or special treatment
► Verification — assets are in place, in use and correctly accounted for
► Valuation — assets are valued appropriately (the basis in the majority of states is fair market value)
Above the line state and local considerations: why should you care? Page 28
Triggering events
► Potential events that could trigger a change in valuation of fixed assets: ► Mergers and acquisitions (M&A) ► Fixed-asset impairment analysis ► Economic downturns and adverse market conditions ► Facility expansions and new construction ► Loss of use of facility due to natural disaster or human error ► Consolidations and divestitures ► Sale, disposal and transfer of fixed assets
Above the line state and local considerations: why should you care? Page 29
What we are seeing
► Challenges ► Sustained, and in some cases increasing, levels of budget deficits
impacting state and local government responses to adjusting property values ► Speed of resolution on appeals has slowed down significantly as jurisdictions
trade the potential for multiple-year changes against a current cash loss
► Increased third-party auditor activity ► Effective tool in identifying unreported assets as a way to increase tax revenue
► Overall residential and commercial values have eroded the tax base, leaving manufacturing, distribution and utility property carrying a larger percentage of the property-tax burden ► The assessment community is pushing back with greater force and frequency
on appeals, value reductions and waivers on fees, penalties, etc.
Above the line state and local considerations: why should you care? Page 30
What we are seeing
► Opportunities ► Aggressively value assets using alternative techniques and
strategies ► Identify and quantify reduction in values for both taxable real
estate and business personal property: ► Physical depreciation ► Functional obsolescence – technology changes, design of facilities ► Economic obsolescence – external factors
► e.g.: FDA denial of new drug, patent expiration, governmental regulations
► Address fixed-asset issues such as unrecorded disposals, accretions, reclassifications, etc.
Above the line state and local considerations: why should you care? Page 31
What we are seeing
► Trends ► Embedded software and intangibles:
► Technology has greatly changed the design and functionality of assets over the last 10 years.
► The role and proportion of embedded software in many manufacturing-related assets has become more significant over time.
► Intangible assets such as software, R&D, consulting, construction soft costs and intellectual property are often embedded in the total costs of an asset.
► Cost-saving benefits from the software/intangible exemption has become attractive and some companies are actively and aggressively pursuing these exemptions.
► Applicable for most industries, but particularly in high tech manufacturing, telecommunications, defense/aerospace, IT, transportation and automotive industries.
Above the line state and local considerations: why should you care? Page 32
Embedded software and intangibles exemption opportunity
► Courts in California and Texas have held software embedded in an otherwise tangible asset to be non-taxable as an intangible.
► A majority of the 37 states that tax tangible personal property do not tax intangible assets that may include, but are not limited to, software.
► Intangible assets are often present on personal property renditions with misclassified assets or unrecorded disposals.
Summary of the issue
An analysis can be performed to segregate the exempt software bundled into hardware accounts, which leads to a reduced property tax basis consistent with statutory authority.
► Taxing authorities in jurisdictions that assess property tax generally will accept the filed rendition, provided it reconciles to the fixed asset list.
► A reduction in value can be achieved by utilizing various proven methods to quantify exempt software.
The identification and quantification of all intangible assets, along with corrected classifications and identification of unrecorded disposals, can be coordinated with a rendition filing that conforms to the fixed asset list, and will generally be accepted by the jurisdiction.
Sales and use tax
Above the line state and local considerations: why should you care? Page 34
What we are seeing
► Challenges ► Difficulty determining taxability of prescription and non-prescription sales:
► Human or animal use? ► Reimbursed by Medicare/Medicaid? ► Defining wholesale vs retail transactions
► Difficulty determining taxability of medical and prosthetic devices: ► Exemption certificate documentation
► Challenge of issuing proper exempt-use certificate to vendor on purchases ► Challenge of securing proper exempt-use certificate from customer on sales
► Technology: ► Developing and employing appropriate use tax accrual process to address promotional
printing/sales reps items ► Use sales factor by state or some other formula (i.e., sales reps in state/total sales
reps)? ► Which general ledger accounts or vendor purchases to include in calculation? ► Is Direct Pay Permit an option? ► Audit challenges of convincing states that a chosen formula is appropriate?
Above the line state and local considerations: why should you care? Page 35
What we are seeing
► Trends ► States are more aggressively attacking use-tax calculations on
printed promotional items/samples: ► Tennessee is well known for attacking all industries (not just health
care-related) on promotional items/samples distributed within the state.
► Ever-changing taxability of software and software-related services. ► States (e.g., PA and CO) are flipping their decisions on enforcing
taxability of applications delivered electronically. ► What is electronically delivered? Certain states tax “electronically
delivered” software, but consider “hosted” applications to be a non-taxable service.
Above the line state and local considerations: why should you care? Page 36
What we are seeing
► Opportunities for pharmaceutical industry: ► State manufacturing exemptions can include:
► Machinery and equipment ► Utilities used in production process (can potentially include utilities
used via heating, ventilation and air conditioning (HVAC)) ► Parts, labor and other maintenance services on such
qualified equipment ► Generally includes packaging materials and supplies
► R&D exemption: ► Lab supplies and equipment ► Utilities used in lab
Above the line state and local considerations: why should you care? Page 37
Nexus — state administrative activity
► Alabama ► Rule 810-6-2-.90.01 (effective August 24, 2012) — guidance on when a seller
has substantial nexus with Alabama; includes affiliate relationships ► California
► CA Regs. 1684 (effective August 26, 2012) — expanded sales/use nexus provisions aimed at remote retailers takes effect September 15, 2012
► Colorado ► PLR-12-002 (May 30, 2012) — out-of-state internet retailer has nexus with
Colorado based on the activities of in-state affiliate ► Hawaii
► LR 2012-10 (July 10, 2012) — out-of-state internet retailer has nexus with Hawaii due to in-state affiliate’s return policy and loyalty points program
► Pennsylvania ► Sales and Use Tax Bulletin 2011-01 (December 1, 2011) — lists activities that
create nexus
Above the line state and local considerations: why should you care? Page 38
Nexus — proposed federal legislation
► Three pieces of federal legislation on nexus: ► The Main Street Fairness Act (S. 1452/H.R. 2701) ► The Marketplace Equity Act of 2011 (H.R. 3179) ► The Marketplace Fairness Act (S. 1832)
► Each bill would permit states to require remote sellers that lack physical presence within the state to collect sales or use tax on taxable transactions with in-state residents.
► The state would be required to adopt some form of sales and use tax law simplification — either through streamlined sales tax or some other alternative.
Above the line state and local considerations: why should you care? Page 39
Judicial updates
► Pennsylvania ► The Pennsylvania Supreme Court has held that MRI and PET/CT
Scan systems that were installed pursuant to construction contracts did not become permanent parts of realty, and were therefore subject to Pennsylvania sales tax. The decision reverses two 2009 rulings by the Commonwealth Court, which relied on a prior Pennsylvania real estate tax decision to conclude that the systems became realty once they had been “attached” to the taxpayer’s structure. Northeastern Pennsylvania Imaging Center v. Commonwealth of Pennsylvania, No. J-100A-2010 (Pa. Sup. Ct. December 21, 2011).
Above the line state and local considerations: why should you care? Page 40
Judicial updates
► Texas ► In a recent decision, the Texas Court of Appeals for the Third
District held that special surgical instruments used in orthopedic surgery were exempt from sales and use tax as orthopedic devices. Zimmer US, Inc. v. Combs, No. 03-11-00178-CV (February 9, 2012). Similarly situated taxpayers should consider filing protective refund claims while the case is on appeal to the Texas Supreme Court.
► The Texas Court of Appeals has held that a private health insurance carrier, Blue Cross and Blue Shield of Texas, Inc. (Blue Cross), was entitled to a refund of sales taxes on purchases related to the administration of federal programs, because the transactions qualified for the sale-for-resale exemption. Combs v. Health Care Services Corporation, No. 03-09-00617-CV (Tex. App. Ct. March 16, 2011).
Credits and incentives: key 2011 survey findings and recommendations
Above the line state and local considerations: why should you care? Page 42
Key 2011 credits and incentives survey findings
Active in incentives arena ► 38% are active or very active in capturing incentives ► 37% are more active today than they were two years ago ► 88% of companies think they will be as active or more active in pursuit of incentives in the next
24 months ► 80% of companies are not aware of or have not claimed any benefits associated with
sustainability and energy efficiency in the past 24 months
Incentives influencing decisions ► 42% and 26% of companies say business expansion is influenced by the availability of
incentives domestically and internationally, respectively ► 39% of companies said that incentives influence their capital expenditure decisions ► 33% of the C-suite is starting to focus or is more focused on maximizing incentives than in the
past
Incentives compliance management ► 57% of companies are managing their incentives compliance with an Excel spreadsheet and
have no formal compliance management process ► 76% of companies have one or less full-time equivalent (FTE) focused on capturing incentives
and credits
Above the line state and local considerations: why should you care? Page 43
Life sciences industry incentives context
► Increased sales in emerging markets ► There is higher projected growth in emerging markets, while mature markets will
see relative stagnation in growth.
► Patent cliff ► Both the number of drug patents expiring and the amount of sales to be affected
are unprecedented in the industry.
► M&A activity and alliances ► Many large life sciences companies have continued the consolidation trend as they
acquire other companies in order to maintain their R&D pipelines.
► Costs and uncertainties of new product development ► Research and development expenditures and extensive and costly clinical trials
lead to high drug development costs and the potential for losses if products in the pipeline are not commercialized.
► Government regulations ► On average, pharmaceutical companies have invested eight years and
approximately US$1 billion in order to develop and commercialize new drugs.
Above the line state and local considerations: why should you care? Page 44
How active is your company in taking advantage of business incentives and tax credits?
Percent of 52 life science respondents Credits and Incentives Study (2011)
4%
37%
44%
10%
6%
0% 10% 20% 30% 40% 50%
Very active, it has a department or team focused on maximizing incentives at all levels, and has
a process in place to identify opportunities
Active
Moderately active
Not active at all, and not interested or don't think they
apply
Not active, and feel company is missing opportunities
Above the line state and local considerations: why should you care? Page 45
How many full-time equivalent (FTE) in-house resources do you have dedicated to business incentives and tax credits?
Percent of 52 life sciences respondents Credits and Incentives Study (2011)
81%
13%
4%
2%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Less than one FTE
One to three FTE
More than three to five FTE
More than five FTE
Above the line state and local considerations: why should you care? Page 46
In your opinion, what have been/will be the two primary barriers to securing business incentives and tax credits?
Percent of 52 life sciences respondents
42%
27%
23%
40%
10%
6%
13%
4%
0%
0%
10%
42%
31%
21%
48%
6%
15%
10%
4%
2%
0%
4%
0% 10% 20% 30% 40% 50% 60%
Operations too busy to execute on the requirements
Program requirements too burdensome
Lack of timely information on transactions
Company in loss position, and cannot take advantage of tax credits
Difficult to coordinate within the various company departments
Too much paperwork required
Tracking too difficult
Company does not want to share data publicly on investment plans, etc.
Company management does not want to participate for business reasons
Employee privacy
Other, please specify:
Next 24 Months Prior 24 Months
Above the line state and local considerations: why should you care? Page 47
How aware is the C-suite (management) of your company with respect to the business incentives and tax credit opportunities?
Percent of 52 life sciences respondents Credits and Incentives Study (2011)
13%
58%
21%
8%
0% 10% 20% 30% 40% 50% 60% 70%
Not aware at all
Somewhat aware
Starting to focus on them more than in the past
Very aware, and focused on maximizing
Above the line state and local considerations: why should you care? Page 48
How important are business incentives and tax credits as a cost-reducing tool for your organization?
Percent of 52 life sciences respondents Credits and Incentives Study (2011)
19%
29%
19%
31%
2%
0% 10% 20% 30% 40%
Extremely important
Important
Neutral
Not that important, but we claim them where we meet the
requirements
Don't know
Above the line state and local considerations: why should you care? Page 49
In your organization, which of the following business decisions are influenced by incentives and tax credits? Check all that apply.
Percent of 52 life sciences respondents Credits and Incentives Study (2011)
49%
44%
42%
35%
16%
14%
16%
23%
12%
0% 10% 20% 30% 40% 50% 60%
Business expansion within the United States
Making capital expenditures
Job creation
Business expansion outside the United States
Business relocation
Real estate/site selection
Job training
Mergers/acquisitions
Other, please specify:
Above the line state and local considerations: why should you care? Page 50
What two primary changes would you like to see in the way state and local governments negotiate or offer incentives?
Percent of 52 life sciences respondents Credits and Incentives Study (2011)
55%
29%
39%
18%
14%
20%
24%
4%
2%
0% 10% 20% 30% 40% 50% 60%
More streamlined application process, i.e., more automation
Less back-end administrative compliance
Increased ability to monetize tax incentives, i.e., assignability,
saleability
Greater predictability in programs
Greater transparency in approval process and criteria
Centralized point of contact
More timely resources
Electronic signature
Other, please specify:
Above the line state and local considerations: why should you care? Page 51
In your opinion, how would you categorize your company’s growth plans via capital expansion over the next 24 months?
Percent of 52 life sciences respondents Credits and Incentives Study (2011)
2%
20%
31%
33%
4%
10%
0% 10% 20% 30% 40%
Aggressive growth (more than 20%)
Strong growth (more than 10% to 20%)
Moderate growth (more than 5% to 10%)
Will remain flat (0 to 5%)
Will shrink
Don't know/Not sure/Refuse to Answer
Above the line state and local considerations: why should you care? Page 52
In the next 24 months, what percent of your capital spend and/or job creation will occur in the United States versus abroad?
Percent of 52 life sciences respondents Credits and Incentives Study (2011)
49%
14%
16%
6%
16%
0% 10% 20% 30% 40% 50% 60%
Greater than 75% within the United States
Greater than 50% to 75% within the United States
Greater than 25% to 50% within the United States
Greater than 5% to 25% within the United States
0% to 5% within the United States
Above the line state and local considerations: why should you care? Page 53
An integrated company-wide process allows the opportunity to realize additional benefits
Limitations of decentralization
► Inefficient data collection ► One-off pursuits ► Single department approach ► Isolated relationships with public
officials ► No leverage of company’s economic
impact ► Value leakage ► Loss of value between
negotiation/realization ► Limited information ► On-demand service ► Irrelevant incentives ► Limited knowledge transfer
Benefits of an integrated global process
► Streamlined/prioritized data collection ► Opportunity pooling (cross-department) ► Established, deep
relationships/continuous contact ► Maximized value ► Detailed information – true prioritization ► Continuous service ► Relevant packages – negotiated with
profile in mind ► Comprehensive/continuous knowledge
transfer
Common processes
Centralization
Global teaming
Knowledge transfer
The power of an integrated process
Above the line state and local considerations: why should you care? Page 54
Integrated incentives function: guiding principles
► Executive sponsorship ► Multiple company stakeholders involved ► Established formal communications protocol ► Clearly defined incentives triggers and thresholds ► Consistent incorporation into larger capital acquisition process ► Standardized data collection process and requests ► Identification/mitigation of “risks to benefits” in any jurisdiction ► Functional technology system for incentives identification, evaluation
and maintenance ► Constant monitoring, tracking and reporting of savings ► Coordinated compliance to reduce clawback risk
Above the line state and local considerations: why should you care? Page 55
Executive sponsor(s)
and project team
Finance/ treasury Tax
Facilities/ real estate
General counsel
Human resources
Government affairs
Operations
Sustainability
Integrated incentives function: integrated stakeholders ► The 8% of our survey respondents who consider incentives a strategic focus are far more likely to
maximize their incentives return on investment. They have defined a multidisciplinary, managed approach to evaluate and capture cost-savings associated with capital investment from budget authorization through compliance.
Business development
Above the line state and local considerations: why should you care? Page 56
Global life sciences incentives triggers
► Research and development ► Pharmaceutical companies continue to make significant investments in
research and development. Because these investments lead to new jobs and the potential for newly created enterprises, this activity is being encouraged by governments around the world through incentive programs.
► Technical hiring ► Because many of the jobs associated with new drug development are
often higher-paying, governments have been targeting them with “high-skilled” job creation incentives.
► Capital expenditure ► Large capital projects such as new manufacturing facilities or service
facilities that lead to significant hiring are frequently eligible for incentives. Governments are willing to compete to provide the most cost-effective location in which to place such investments.
Above the line state and local considerations: why should you care? Page 57
Global incentives trends
► Increased internal scrutiny on business case for investments, including incentives
► More outbound investments in low-cost or developing countries
► Consolidation and rationalization seen as more routine decisions
► Increased research and development demands
► Higher-quality job creation
► Impact of climate change and sustainability considerations
Above the line state and local considerations: why should you care? Page 58
Types Description
Negotiated grants Some countries make cash grants available on a negotiated basis for approved projects, for example.
Tax incentives Some countries offer tax incentives that provide large deductions or credits for R&D expenditures. These programs range from a 130% deduction in the UK to a 400% deduction in Singapore.
Patent boxes Patent box regimes allow companies to pay lower taxes and potentially receive other preferential treatment for locating intellectual property within the respective country.
R&D grants
The European Union funds 50% of qualifying costs on approved R&D projects. FP7 has budgeted €6.1 billion for health-related projects. IDA Ireland provides cash grants on a discretionary basis to investments involving R&D.
Hiring incentives
Hiring incentives are generally made available for significantly increasing location headcount as well as for creating jobs that require higher-skilled/higher-paid positions. Incentives may be in the form of wage subsidies or tax relief.
► Measures used by authorities around the globe to influence behaviors within their jurisdictions, including statutory and discretionary programs for both tax and non-tax benefits, include:
Global incentives solutions for life sciences companies
Above the line state and local considerations: why should you care? Page 59
Sample activity categories and incentive types
Research and development
Sourcing and supply
Production and manufacture Distribution Delivery
Common activities:
Note: refer to slide 58 for incentive types available in each category above
► R&D ► A health care company obtained discretionary cash grant, which funded 60% of R&D costs.
► Sourcing and supply ► A life sciences company considering locating a R&D center in UK or Ireland was able to
successfully negotiate a cash grant in Ireland to subsidize R&D costs.
► Production and manufacture ► A manufacturing company considering opening a new manufacturing facility in Malaysia found
that making minor adjustments to business purposes, such as including R&D operations in the manufacturing facility, would qualify investment for considerable cash subsidies.
► Distribution ► A large company was able to obtain a 10-year income tax exemption when relocating its
distribution center in China.
► Delivery ► A manufacturing operation was able to obtain funding for modal shifts in Europe.
Above the line state and local considerations: why should you care? Page 60
Sample global incentives
Region Country R&D Location Climate change and
sustainability
Americas
Argentina v √ Brazil √ √
Canada √ Colombia √
Mexico √ US √ √ √
Asia-Pacific
Australia √ √ China √ √
Indonesia √ Korea √
Malaysia √ Singapore √ √ Vietnam √
EMEIA
Belgium √ Czech Republic √
France √ Germany √ Hungary √
India √ Ireland √ Poland √ Russia √
South Africa √ Spain √
UK √ √