Clinical Trial Financial Management: How to Manage Global Tax
The Clinical Financial Blog was created to address the complexities that are encountered with financial management of clinical trials. With a lot of critical financial requirements still not being fully understood and addressed, we’ve got you covered. Medidata’s team of experts that have lived and breathed the budgeting and site payments processes for many years will be providing first-hand experiences, sharing knowledge and recommendations that have been built up over many years of direct experience with sponsors, CROs, and sites. This month’s topic covers global tax considerations.
What is global tax?
- Taxation at a country-by-country level
- Often referred to as indirect or transactional tax
- Examples are VAT (value added tax) and GST/QST
- There are upwards of 170 countries globally who have VAT regimes—the US is one of the few that does not.
- These taxes range from 4.5–27%
- There are some jurisdictions where payees may need to ensure withholding taxes are withheld from payments as well. Russia is just one example.
- If withholding taxes apply, these funds should be offset from the payment and immediately remitted to the corresponding tax authority as there are filing time restrictions and penalties when not paid timely
How should you handle it?
Ultimately, your goal is to be in a zero rated VAT situation (meaning VAT would be applicable for the service performed but is exempt). The general rule of thumb is if the site/payee and the service recipient (usually sponsor but if the CRO is contracting on their own paper, it may be them) are in the same country, VAT will apply.
With the exception of Australia, this is rarely a legal requirement but the way it’s simply “always been done” for a host of reasons such as language or business custom, but this results in added tax cost that may simply not be recoverable as well as added burden for sites and internal sponsor/CRO staff for recovery tax returns.
If the site/payee are in different countries, even within the EU, it is generally considered a cross-border transaction . A regional contracting model will largely ensure that VAT is zero rated. Have the tough conversations with local entities—consult tax and legal professionals when in doubt. If you can’t avoid it, make sure you are prepared to recover it. Advanced preparation is key!
Make sure that invoices are formatted correctly. Universal invoice formatting requirements include:
- Clearly identify the date (and this date must pre-date the funds being paid)
- The payee’s unique invoice number (from their accounting system)
- Clearly identify the payee, it’s VAT registration number and address (this may be contained within the letterhead)
- Clearly identify the name of the “service recipient” as defined in the CTA
- The math must actually add up correctly - on the invoice and the value of the payment transmitted (wire and banking fees are normal post transmission deductions)
- Additional fields may be required depending on jurisdiction
Know how to file VAT recovery returns in each jurisdiction before you begin contracting within it. Some jurisdictions require e-submission, some require paper. Being submission ready isn’t just an FDA thing—decentralized processes will make VAT returns difficult, so across the portfolio reporting is a necessity!
Not all countries will require proof of transaction with filing, but if there is a query or audit you will be required to provide additional documentation so having a central repository for invoices is essential—if you can’t answer the query, you will not recover the funds (even if you can answer the query, you still may not as FYI). VAT returns are never a guarantee. The only safe strategy is one that avoids paying VAT.
What should you be concerned about?
Balancing risk vs. reward in geographies that offer research tax credits (ex. Canada)
- Many times to be eligible for these credits, the company and payee must be locally contracted and appropriately registered with the local tax authority. However, what is the ROI on credits vs not having to pay local tax at all? Do the analysis (and in truth, this analysis should be reviewed regularly as volumes and tax credit laws change).
Recovery or lack thereof—this can represent more than 20% of a protocol’s expense that you may simply not get back. Many organizations consider VAT a sunk cost.
- Take a hard look at what you have paid out in VAT over the last 2-3 years—how many other studies could you have run on that money?
- Even if you did recover it, what was the cost of that recovery? Staff time, site time, future value of the funds, etc. Governments do not pay interest on funds that sat in their coffers for more than a year while you could have been reinvesting that money into your pipeline.
Paying avoidable or incorrect tax
- Anecdotally, when one of our customers enabled auto tax in Canada it caught that a site had been using a significantly higher tax rate than they should have been...for several years. Innocent mistake on the site’s part, completely avoidable on the sponsor’s!
- Remember, even if VAT is recoverable, it can’t be recovered until it’s paid...this means you pay the site. The funds will be out of pocket until if and when it can be recovered which can be months or even years—sometimes even after a trial is finished. If this cash outlay is not incorporated into a budget, the repercussions are herculean.
- Sites generally do not have tax professionals on staff. Sponsors & CROs do. Yet historically this burden has been shifted to the site with zero support from the industry. Solutions like Rave Site Payments bridge this gap in a reliable way with automated & independently validated tax logic.
When should you leverage experts?
Whenever you are entering into a new country or region, do the due diligence to avoid costly mistakes. If you are routinely carrying taxes in your protocol budgets, get an expert opinion on whether your contracting model is as efficient as it can be. Recognize the experts in your vendor network are great sources for guidance—this doesn’t have to be a high dollar consultant or FTE.
What do you wish you knew before dealing with global tax?
That “the way it’s always been done” is generally acceptable as justification for not doing it differently when it comes to tax management—I have had more conversations than I wish to count with organizations insisting that they must contract locally because their team believes that is the requirement when no one has done the research to validate it or the research was done years ago. Laws change!
What can everyone start doing right now with global tax?
Evaluate your contracting model strategy first and foremost. Very few jurisdictions require locally contracted agreements by law. In fact, if local contracting is used, that may dictate whether payments can be made to payees across-border or not so this has up and downstream implications.
Evaluate your position on sites doing all the heavy lifting—sites are in the business of treating patients, not managing tax code. We made strides in the industry with the general acceptance of a pro forma so why not automate the tax as well?
About the Author:
Holly Leslie, solution specialist, clinical trial financial management
Holly has spent the last 14 years on the operations side of clinical trials, focusing primarily on payments, grants and strategic operational support, supporting hundreds of trials across a variety of sponsors and CROs. Prior to the clinical trial industry, Holly spent more than ten years working in accounting, project management, and master data management in the pharmaceutical and systems integration fields.
Holly lives in the suburban Philadelphia area with her husband Tim, enjoying the empty-nester life with their two dogs and two cats. She is an avid trivia buff who enjoys art and cooking as hobbies. Her claim to fame is winning two separate poker tournaments in Las Vegas!