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ATO on Life Sciences: 'One size does not fit all'

ATO on Life Sciences: 'One size does not fit all'

Jeremy Capes and Kelly Chong discuss the ATO's risk reviews or audits of Life Sciences and medical devices companies.


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Stack of pills

Healthcare organisations are increasingly recognising the need to move beyond a ‘one size fits all’ approach to their customers, towards tailored heathcare that meets the unique needs of each individual.

Similarly, the Australian Taxation Office (ATO) considers taxpayers to be as uniquely individual as their customers, as discussed when KPMG's Life Sciences team recently met with the ATO's Life Sciences Cluster.

Current focus

The ATO is currently examining 21 pharmaceutical companies through Advance Pricing Arrangements (APA) , risk reviews or audits and will also focus on 200+ Life Sciences and medical devices companies. The ATO is considering a full spectrum of tax risk across the industry, including transfer pricing, research and development (R&D), withholding tax, tax risk management and governance and, in certain instances, anti-avoidance.

Key observations

Some specific observations made by the ATO include:

  • Given the various sub-segments within the industry, providing general pricing or outcomes guidance would be difficult. Rather, the ATO focuses on the specific facts and circumstances of taxpayers under review. 
  • The ATO expects taxpayers to determine the value provided by Australian operations in the context of the global value chain and the Australian regulatory environment. The ATO does not consider transfer pricing policies should drive the characterisation of a local taxpayer; rather characterisation should be determined based on the functional analysis, focusing on those managing and controlling risk and value creation. 
  • Acknowledging limitations regarding available benchmarking data, the ATO will generally look to utilise a variety of transfer pricing methods to ascertain arm’s length value and will have particular focus on dealings between taxpayers and third parties as benchmarks.
  • Careful consideration is being given to the economic substance of off shore activity, particularly trading hubs and IP transfers; consolidation and corporate restructuring events, particularly reverse restructures; and thin capitalisation.
  • The ATO expects to release Diverted Profits Tax guidance soon, which would outline high and low risk examples. 
  • The ATO has identified a growing inconsistency in the treatment of costs for transfer pricing purposes and R&D offset purposes.

Next steps

The ATO observations signal that pharmaceutical and Life Sciences will continue to be a priority focus for the foreseeable future.

Remember, there is no ‘one size fits all’ approach to healthcare or tax. Don’t wait for ATO contact or general guidance. Regardless of whether or not you are a large taxpayer, now is the time to revisit and reassess your tax governance, risk and transfer pricing policies.

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