Indirect tax compliance at the age of MedTech Innovation
The emergence of new trends has serious implications for the ability of medical technology (MedTech), companies to maintain compliance with indirect taxes (IDT) regulations and rules. Compliance has traditionally been a complex undertaking for the MedTech industry, but the advent of advanced, integrated technologies and global business operations are introducing additional considerations that must be addressed.
Over the past decade, the MedTech industry has experienced significant, steady growth. The Pulse of MedTech Industry report by global EY says that the industry will have reported US$23.9billion in dividends and buybacks in 2023. This is the second highest amount ever recorded. With this growth, there is a proliferation of hundreds of intricate categories of diagnostic and patient treatment medical equipment.
Corporate tax departments also must contend with limited resources, including budget constraints and a shortage of skilled professionals. They must balance the need for compliance and implementation of the optimal tax strategies, while keeping up with constantly evolving rules and rates for sales and use tax (SUT), consumer use tax (CUT), value added tax (VAT) and other goods and services taxes (GST) across the globe.
Highlights:
Navigate MedTech IDT complexities with emerging tech and global operations insights.
Streamline tax compliance using Thomson Reuters ONESOURCE for real-time accuracy.EY and Thomson Reuters offer integrated solutions for efficient tax management.
|
Trends and considerations that make IDT compliance challenging for MedTech companies
1. Emerging technologies.
The rapid advancement of medical technology has introduced a range of new products that do not necessarily fit into existing tax classifications. MedTech is increasingly dominated by digital health tools, AI diagnostics, and software as medical devices (SaMD). These innovations blur the lines between traditional goods and services, making it difficult to determine the correct tax treatment.
Some jurisdictions may tax software differently from hardware, while others might treat certain digital health tools as exempt from VAT if they are deemed necessary for patient care. The challenge lies in navigating these distinctions and staying up to date with how various governments classify and tax emerging technologies.
2. Value-based care is the new model of care. Value-based care is based on patient outcomes, not the quantity of services provided. This means that MedTech companies will increasingly be paid on a value-based basis, rather than a unit-based basis. It is difficult to determine whether these arrangements should be taxed based on the supply of services or goods, or a combination of both, especially when they cross borders and different countries have different tax treatment for services and goods. Data access and connectivity. Many modern medical devices are now connected to the cloud, enabling continuous data exchange, remote monitoring and real-time diagnostics. These connected devices are beneficial for patient care but add new layers of complexity in IDT. It can be difficult to determine the taxable value for such products and services, especially when data services are used across international borders and trigger extra tax obligations like digital service taxes (DST) and telecom-specific levies. Cross-border transactions.
MedTech companies often operate globally, with production, distribution, and sales spanning multiple countries. Cross-border transactions can complicate IDT calculations, as each jurisdiction may have different rules for VAT, GST, or sales taxes. Import and export duties can apply, along with reverse-charge mechanisms, zero-rated goods, or special exemptions for medical products.
Determining the correct tax treatment requires careful consideration of each country’s tax regulations, ensuring compliance in a landscape where even slight regulatory differences can lead to penalties, back taxes or double taxation.5. Bundling of services and goods.
MedTech is increasingly being sold as part of service packages that include technical support, training, and even outcome-based warranties. These bundles pose significant challenges for IDT calculations because different elements of the package may be subject to different tax treatments.
While the physical medical device might be subject to a reduced VAT rate as a healthcare-related good, the accompanying support services may be taxed at a higher rate. Accurately allocating the value of each component and applying the correct tax treatment requires robust accounting practices and often results in tax audits to ensure compliance.6. Global trade policies are constantly changing.
As trade agreements and geopolitical tensions evolve, IDT’s global landscape is constantly shifting. Tariffs, import and export duties and local taxation rules can all impact the way MedTech companies structure their operations.
Trade policy changes may result in new duties being applied to goods that were previously duty-free or cause certain medical devices to lose their preferential tax treatment. These changes require MedTech companies to stay agile and informed, as failure to comply with new trade and tax regulations can lead to disruptions in supply chains and unexpected financial liabilities.7. Medical devices and supplies are often subject to special tax treatment.
Depending on the jurisdiction, medical supplies and devices may be subject to reduced or zero-rated VAT. For example, certain consumable medical products such as syringes or bandages might be subject to reduced or zero-rated VAT as part of a government’s public health policy.
However, qualifying for these exemptions can be difficult, as the criteria vary from one country to another. What is a tax-exempt supply of medical supplies in one region might not be applicable to another, forcing MedTech firms to track and classify products according to local laws. Taxation and licensing of intangibles. MedTech businesses often rely on IP, such as trademarks, patents, licenses and trademarks as a key part of their business models. Taxing these intangibles is a challenge, especially when it crosses borders. Countries differ in how they tax royalty payments, licensing agreements, and IP transfers.
For instance, licensing medical technology to foreign distributors or partners could trigger withholding taxes. Determining whether these intangibles should be taxed under the rules for services, digital products or other categories adds a new layer of difficulty.
Reduce complexity and increase efficiency through technology and automation
More than one-third (37%) of respondents in the Thomson Reuters 2024 Challenges and Changes in Indirect Tax & Compliance report said that staying compliant amid rapidly changing tax laws throughout multiple jurisdictions remains a significant concern. It’s just more data than the current processes can handle.
In actuality, among IDT respondents, over 40% believe it is crucial to adopt the right automation and technology to keep up with regulatory change and be an effective function in the organization. Respondents also cited a shortage of qualified staff as a major concern. Indeed, almost 4 out of 10 respondents (39%) said their department was already feeling the effect of resource constraints.According to the latest EY Tax and Finance Operations Survey, tax personnel currently spend nearly half of their time (45%) on routine compliance work, which includes data collection and cleansing, tax return compliance and related reconciliations. Tax practitioners spend just 20% of their time on higher-value work such as data analysis, tax planning, managing tax controversy, general strategy, communications and risk management. Meanwhile, tax practitioners spend just 20% of their time on higher-value work such as data analysis, tax planning, managing tax controversy, general strategy, communications and risk management.
By adopting the right technology, tax departments can accomplish several goals at once: make the most of their existing resources — including upskilling workers, keeping up with constantly changing tax rules and regulations, increasing time for higher-value work and adding greater speed and accuracy in their tax reporting.
Thomson Reuters ONESOURCE Indirect Compliance streamlines the tax compliance process with real-time tax rates and rules, customizable tools and support for e-filing — plus powerful data reconciliation, adjustment and reporting capabilities. This single, centralized solution lets you move beyond complex, country-specific spreadsheets to help you stay compliant wherever you do business internationally.Leveraging Thomson Reuters tax technology with EY industry knowledge
The alliance between Thomson Reuters ONESOURCE and EY Tax Technology and Transformation services aims to reduce the MedTech industry’s compliance challenges. Thomson Reuters’ global tax and accounting software combined with EY’s tax knowledge and global network offers integrated and agile solutions. This collaboration leverages cloud-based platforms and secure access to transform the way tax departments solve problems, source alternative business models, and interact with tax authorities. It ultimately advances clients’ business strategies in a digital age. This collaboration creates a tax function which is intelligent, agile, and forward-thinking, harnessing the power and flexibility of data and integrating seamlessly to foster innovation-driven growth. This empowers MedTech enterprises to focus on innovation and patient care, providing confidence that their indirect tax obligations are managed efficiently.
Learn more about Thomson Reuters ONESOURCE Indirect Tax Compliance solutions.
– Back to blog
