For such pharmaceutical companies, appropriate methods for adjusting actual profits may need to be identified, on a case-by-case basis and by taking into consideration the overall functional and risk profile of the entities involved.
In October 2009, a “clawback tax” system was introduced into Romanian law, with measures generally affecting producers and distributors of medicines sold through hospitals and/or pharmacies and with prices set by the government (i.e., the government finances the transaction).
In principle, holders of “market authorizations” that place medicines in the market (whether the holders are residents or non-residents of Romania) owe the “clawback tax.”
The rate of “clawback tax” has varied over time, ranging between 5% and 30% of the amount of the pharmaceutical sales.
Recently, the “clawback tax” rate was set at approximately 14.5% of the amount realized on sales of the medicines (not subject to value added tax (VAT)).
When tax liability arises
The “clawback tax” is theoretically owed at the moment in time when the subject medicines are used by the patient. This time could potentially be seen as the date when the government pays for the value of the medicines used. However, in practice, the state can be quite late in making such payments.
Commercially, it would seem that the amount of “clawback tax” liability would be split between producers and distributors, but some distributors (especially independent distributors) take the position that producers must ultimately bear the entire burden of the “clawback tax.”
In general, the pricing of medicines financed by the state is either regulated (capped to a maximum level) or agreed to during a public tender processes. This system does not allow much flexibility for pricing medicines in Romania—nor with respect for transfer pricing purposes, either.
Both the distribution and retail supply chain prices for prescribed medicines (i.e., issued pursuant to a prescription) have maximum prices and thus maximum margins which, by law, cannot be exceeded.
While these strict regulations on the pricing of medicines could be viewed as indicating a lack of risk for potential transfer pricing adjustments, in practice, this is not the case. Rather, in reality, all pharmaceutical companies need to prepare transfer pricing documentation for all intra-group transactions.
Romanian pharmaceutical companies that register expenses due to the “clawback tax” may find that the selected profit-level indicator and the actual profit at year-end significantly differ from the arm’s length profitability range identified during a related benchmarking study (i.e., profit may be too high or too low as compared to the selected comparable companies).
A pharmaceutical company that misses the arm’s length profitability range could see additional corporate tax being assessed by the Romanian tax authorities when “clawback tax” is owed.
Methods for adjusting actual profits
If a pharmaceutical company finds the presence of such risk, then appropriate methods for adjusting actual profits need to be identified, on a case-by-case basis, and depending on the overall functional and risk profile of the entities involved, so that:
- Expenses concerning amounts of the “clawback tax” are excluded from the operating profit of both the Romanian taxpayer and the selected comparable companies. In practice, this may be difficult to achieve because various countries have different clawback tax systems (if they have them at all).
- Expenses involving the “clawback tax” are excluded from the operating profit of the Romanian taxpayer, if it is shown that the operating profit of the selected comparable companies did not also include these expenses. However, a number of countries have various clawback tax systems, and it is expected that the profit and loss account of pharmaceutical companies would be affected by a clawback tax regime.
- The “clawback tax” burden is split within the chain of supply. In some instances, it may be entirely a burden of the producer; thus, other entities in the supply chain are relieved from expenses involving the “clawback tax.”
For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services group in Romania:
+40 (740) 104 391
+40 (747) 333 131
Or contact a tax professional with KPMG's Global Transfer Pricing Services.