Trump’s tax reform plan: What it means for pharma, medical device and equipment supply chains

By Doug Strang, Global Pharmaceuticals &Life Sciences Advisory Leader at PwC and Kathy Michael, PwC’s US Pharmaceutical & Life Sciences Tax Sector Leader

President Donald Trump and Republican lawmakers propose significant overhauls of the US tax code this year that likely would lower corporate taxes and encourage US-based manufacturing. An “America First” tax code would pivot away from policies that led to offshore intellectual property holdings and a manufacturing base distributed across the globe. Pharmaceutical, medical device and medical equipment companies may benefit from re-evaluating and potentially restructuring their supply chains.

President Trump’s proposal, as outlined in his tax plan, reduces the US corporate tax rate to 15% from 35%. He proposes an option to immediately deduct capital investment spending for companies manufacturing products in the US. The plan also includes a mandatory one-time tax rate of 10% on unremitted foreign earnings.

Republican lawmakers have their own plan, which shares some similarities with the president’s proposal. Their tax blueprint, put forward by House Speaker Paul Ryan, R-WI, and House Ways and Means Committee Chairman Kevin Brady, R-TX, would lower the corporate tax rate to 20%. It would levy a one-time repatriation tax on unremitted foreign earnings at an 8.75% rate on cash held overseas and a 3.5% rate on non-cash foreign assets.

A “border adjustment” provision would exempt exports from taxation and disallow a deduction for imports. In a January speech to the US Chamber of Commerce, Chairman Brady said the “GOP tax plan is already driving companies to ask themselves, ‘How soon can we bring our suppliers back to the US?’ ”

In addition to overhauling domestic tax policy, President Trump aims to renegotiate trade deals such as the North American Free Trade Agreement (NAFTA) and has suggested a “border tax” on products imported to the US by companies that formerly operated in the US. He signed an executive memorandum pulling the US out of the Trans-Pacific Partnership negotiations and agreement.

A reversal of tax incentives to favor stateside production could lead some pharmaceutical companies to reconsider the structure of their global supply chains. Some top industry executives from the largest US-based pharmaceutical companies have suggested an openness to moving workforces back to the US, should tax and trade reforms occur, according to an HRI analysis of post-election earnings calls and other public statements. Several others have suggested that repatriated dollars could be used to repay company debt, fuel new business development or reinvest in US-based projects.

In a January meeting, President Trump told pharmaceutical executives that he would reduce regulations and taxes to encourage domestic drug manufacturing. He also asked the chief executives of Merck & Co. and Johnson & Johnson to work with him and other business leaders on a “Manufacturing Jobs Initiative.”

Industry Implications

More pharma and life sciences manufacturing could come back to the US. Companies need to analyze their operational structures to understand the impact on US and foreign taxes, and on foreign costs with potential dollar appreciation. However, it took years for pharma and life sciences companies to build their current global operational structures, and it would take the industry years to unwind them in response to reforms.

Access to overseas capital may drive new investment activity. Pharmaceutical companies that repatriate overseas cash could drive up deal activity for mid- to late-stage drug candidates. Competition for new assets could, in turn, lead to higher valuations and product deal amounts. Other companies may decide to invest in new manufacturing or R&D programs, especially as current reform proposals preserve the R&D tax credit, which lowers the after-tax cost of funding research and development.