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insights LIFESCIENCELEADER.COM APRIL 2014 44 CONTRACT SOURCING F A P R I L M U L R O N E Y VAT AND THE CLINICAL TRIAL ENTERPRISE By A. Mulroney VAT And The Clinical Trial Enterprise As clinical trials become more global, sponsors and CROs face a myriad of financial, contracting, and compliance challenges. One of the most pressing: understanding and managing the impact of Value Added Tax (VAT). or trials based solely in the United States, VAT is a non- issue. But when a trial extends into any of the 150 countries that assess VAT, sponsors and CROs must be prepared to navigate the complexities — and manage the costs. This article captures key insights shared by a recent panel of experts from CFS Clinical, EY, and a leading specialty pharmaceutical company. VAT: THE BASICS VAT is a transactional tax (also known as consumption tax or indirect tax) that applies to all transactions — products and services alike. In the clinical trial realm, VAT could therefore apply when a local investi- gator provides trial-related services. VAT should be considered when plan- ning for a clinical trial, as these taxes are not inconsequential. Ranging from 5 to 27 percent, VAT can instantly add to the grant spend budget if the appropriate planning is not done. Adding to the complexity is the fact that rates and rules can vary from country to country. For instance, Japan has the lowest rate at 5 percent (rising to 8 per- cent in April 2014), while Hungary has the highest individual rate at 27 percent. The European Union indirect tax rates range from 15 to 27 percent; Latin America, 15 to 35 percent (combined; there are several indirect taxes in Brazil); and Asia, 5 to 17 percent. The good news is, depending on the tax laws of the countries in question, sponsors and CROs may have opportunities to mini- mize or recoup some of the VAT exposure. The bad news is that if VAT must be paid, the ability to obtain such refunds in a number of countries can be complicated and comes without guarantee. SOME BASIC PLANNING The primary consideration for VAT plan- ning is the clinical trial agreement (CTA) structure with the investigator, as this will form the basis of determining whether VAT will be applicable. By having an under- standing of available VAT exemptions and reduced VAT rates in each country, it is quite possible to develop a go-to model of CTA contracting that will decrease the risk of irrecoverable VAT on a study altogether. It is always better to not pay VAT in the first place, than to pay VAT and then try to get it back. RECOVERING VAT To the extent that VAT is to be paid on a clinical trial, there are a number of best practices for increasing the likelihood of its recovery: 1. Be diligent about documentation. If a trial is audited, the likelihood of recov- ering VAT is slim if the documentation is not thorough, organized, and up to date. This applies to all the parties of the CTA — from sponsor to CRO to investigator. The CTA should be evaluated on a country-by- country basis to determine the applicabil- ity of VAT in accordance with the local VAT legislation of each country. This will form the baseline to monitor the process so that VAT is not being charged when it doesn't apply. Agreements should cover these key questions: To whom are the services actually being provided? What is the VAT treatment of those ser- vices? How are the invoices being raised, and do they meet certain requirements? Who is making the actual payments? 2. Maintain visibility. Determine up front whether or not VAT is factored into the grant spend estimate and whether the CTA budget is inclusive of VAT. In addition, if VAT is to be paid, ensure there is a robust reporting function to track VAT paid by country by protocol and where the VAT credits are in the reclaim cycle. This will provide the basis to follow up on avail- able VAT credits with local authorities and ensure that the credit is ultimately applied to the correct grant account. 3. Invoice properly. Each country has its own VAT rules and invoicing requirements. As legal documents, invoices must meet local legal requirements. Failing to submit a legally binding invoice based on the tem- plate of the country in which the investiga- tor is operating exposes a trial to tax assess- ments. Further, it decreases the chance for a refund—even when one is merited. 4. Mind the cash flow. Even if the spon- sor does qualify for a refund, the VAT must be paid first, and then the sponsor can file to receive the payment. Depending on the invoice payment terms and the country the VAT is paid to, it could be months or even years before the refund is issued. Thus, it's critical to factor the temporary payout into the budget to avoid a cash-flow crisis for the trial. NETTING IT OUT As the geographic reach of clinical trials widens to include investigators in other countries, VAT stands to have a huge impact on the budget, cash flow, and bottom-line performance of any global study. It is essen- tial for sponsors and CROs to recognize the potential impact, to plan for that impact sooner rather than later, and to be realistic about whether and when they may receive refunds. While VAT rates and rules are complex and ever-changing — comprehensive, con- sistent, and current trial documentation 0 4 1 4 _ C o n t r a c t _ S o u r c i n g . i n d d 1 0414_Contract_Sourcing.indd 1 3 / 2 4 / 2 0 1 4 3 : 5 9 : 2 3 P M 3/24/2014 3:59:23 PM