Taxing continuous manufacturing - seven considerations

by Andrew Taylor Global Operating Model / Transfer Pricing Partner, PwC United Kingdom

Email +44 (0)7921 106500

The operational benefits of continuous manufacturing are clear but with tax authorities showing an increasing focus on pharmaceutical companies, it's essential that finance and tax teams are aligned to ensure operational changes do not create unnecessary tax risks. 

Here are seven key considerations:

1. Value chain 

Tax authorities typically look to ensure that the allocation of taxable profit is aligned to where value is created.  The traditional perspective on value drivers in pharma has been to attribute value, and therefore profits, to intellectual property (IP) or R&D and, to a lesser extent, effective sales and marketing functions. Limited risk manufacturing functions are not typically viewed as key value drivers and therefore have not traditionally tended to attract significant profits.

With continuous manufacturing driving significant benefits - cost, speed to market and increased productivity - more value, and therefore profits, might be attributable to the manufacturing function than in a more traditional pharmaceutical business.

It is therefore essential a group considers whether the change in manufacturing processes disrupts its value chain and how system profits should be allocated across different functions as this could have a significant tax impact.

2. Managing the business change

Tax authorities might interpret the implementation of continuous manufacturing as an important change to the manufacturing operations of the business and attribute value to functions carried out by the employees involved in the implementation of the new manufacturing processes, methodologies and techniques. 

If a tax authority assesses a share of any financial benefit should be attributable to these functions it could create an unexpected tax exposure.

3. Limited risk / contract manufacturing models 

Those operating limited-risk manufacturing models, for example contract or toll manufacturing, should consider what is required to ensure that manufacturers are housing and bearing the appropriate levels of functions, assets and risks consistent with their group role. 

Changes to the level or type of these may have implications on the transfer pricing model and the level of profitability a tax authority would expect the manufacturer to earn. 

4. Intellectual property ownership 

While many pharma companies centralise the majority of their core IP, continuous manufacturing processes could result in local and potentially valuable IP being created through the set up and design of the new manufacturing function and underlying technology.

Where key IP is being developed and owned locally a tax authority may expect increased profits to compensate the local entity for this. If the group is looking to maintain its centralised IP policy it is therefore important that wherever possible, all elements of this potential IP development are owned, controlled and driven by the principal.  They will need to show how the requisite substance, processes and controls support and evidence this in the event that a tax authority challenges the position. 

5. Research & development location

Implementation of continuous manufacturing could possibly entitle taxpayers to claim R&D incentives as manufacturing improvement projects can qualify as development. 

Where a continuous manufacturing line is used as part of the development process, further tax incentives can potentially be used with respect to the capital investment.  

6. Modular flexibility 

Modular flexibility may result in more frequent transfers of both manufacturing lines and people as organisations look to more actively manage and align production capacity and customer demand on a global basis. The movement of both people and material capital or value driving assets could result in a capital gain and or exit charge in the territory in which they were originally situated.

Governance and policies are needed to ensure that these assets are being transferred at consistent and appropriate valuations and that the related reporting obligations, for example European Union Mandatory Disclosure Rules, and associated tax obligations, are being met.

7. Creation of a taxable presence

The physical location of a production facility could create a taxable presence through the creation of a fixed place of business permanent establishment, even if there is no legal entity or any other activity of the group within that territory. Although territory dependent it’s important that this is monitored to ensure tax compliance responsibilities are adequately met.

Please get in touch if you’d like to discuss this and to find out more see this joint paper from CMAC and PwC, which makes the business case for continuous manufacturing.


by Andrew Taylor Global Operating Model / Transfer Pricing Partner, PwC United Kingdom

Email +44 (0)7921 106500

Read more articles on