Health-Care Companies Must Prep to Pass Transfer Pricing Tests

Health-care and medical device companies should start preparing for operational and regulatory changes stemming from the US Supreme Court ruling in Loper Bright Enterprises v. Raimondo finding courts no longer have to defer to federal agencies’ own interpretations of laws and statutes.

Medical companies also should prepare for the implementation and ongoing refinement of global tax regulations affecting intercompany transactions. There are several emerging trends and challenges to consider.

Regulatory scrutiny and compliance. Growth in the medical device industry has led multinational enterprises to consolidate and invest heavily in advanced technologies. But the pursuit of innovation is fraught with challenges, particularly when navigating disputes with the IRS over the valuation of intangible property.

Abbott Laboratories, for example, petitioned the US Tax Court to contest nearly $417 million in assessed deficiencies for the 2019 tax year, challenging the IRS’s adjustments to its royalty income and the inclusion of stock-based compensation in its cost-sharing arrangements.

The ongoing litigation involving Medtronic highlights further complexities, as the IRS challenged Medtronic US’ licensing of intangible property to its Puerto Rican subsidiary. In Amgen Inc. v. Commissioner, the IRS challenged Amgen’s claim to a share of the profits from biologic drug sales.

Tax authorities’ heightened scrutiny of intercompany charges related to licensing intangible property particularly affects health-care and medical device companies due to their diverse portfolios, which include device design, manufacturing processes, software algorithms, and branding. Determining a definitive price for intangible assets poses significant challenges because of the inherent subjectivity of their valuation.

This complexity is exacerbated when tax authorities have broad discretion to interpret statutes, allowing them to construct arguments that align with their positions. Consequently, companies are left vulnerable to challenges to their pricing methodologies.

Global competition and cost pressures. International trade shapes manufacturing practices and transfer pricing compliance for the medical device industry. With US exports representing one-quarter of domestic manufacturers’ revenue, and imports fulfilling over one-third of domestic demand, companies are operating in a competitive global market.

Potential tariffs from the Trump administration could disrupt global supply chains. Manufacturers in countries with lower production costs, such as Mexico, can offer more affordable prices, challenging traditional players such as German manufacturers. But tariffs may change the game for such manufacturers. Either way, the competitive landscape pressures companies to optimize their cost structures while complicating transfer pricing strategies.

Judicial changes and tax compliance. The Supreme Court’s Loper Bright decision represents a significant shift in how courts interpret agency regulations, including those issued by the IRS concerning tax compliance. By overruling the Chevron doctrine, courts can exercise independent judgment in assessing whether agencies have acted within their statutory authority.

This change could have profound implications for pricing strategies for intangible property of health-care and medical device sectors companies. With courts now positioned to challenge IRS regulations more rigorously, multinationals facing IRS scrutiny may find greater opportunities to contest IRS tax positions.

OECD BEPS initiatives. The Organization for Economic Cooperation and Development’s Base Erosion and Profit Shifting project aims to standardize transfer pricing rules globally. But while it seeks to create a fairer tax environment, it also introduces complexities for multinationals as they navigate diverse regulatory requirements across jurisdictions.

Tax professionals must stay informed about these developments to help their clients comply and develop optimal transfer pricing strategies by keeping track of tax authority releases and alerts from service providers.

Key Priorities

Tax professionals working with clients in the health-care and medical device sectors should prioritize several strategies to address emerging trends and challenges in transfer pricing.

Employ widely accepted valuation methodologies. Use income, market, and cost approaches to establish a consistent basis for valuations, ensuring defensibility in pricing practices.

Consider advance pricing agreements. Entering into such agreements with tax authorities help gain certainty over transfer pricing practices, which can diminish the risk of disputes and enhance compliance.

Conduct regular internal audits. Perform audits and reviews of valuations and transfer pricing practices regularly to identify potential issues early and stay current with tax regulations. Doing so can prevent minor discrepancies from escalating into significant disputes and reinforce compliance.

Establish thorough and robust documentation practices. Develop record-keeping that captures all relevant data related to intangible asset development. This includes research and development expenses, market studies, and comparable transactions. Emphasize the importance of conducting regular valuations and ensuring royalty agreements are justifiable. The use of corroborative analyses may help if audited.

Engage with policymakers and tax authorities. Actively advocate for clearer guidelines and standards related to intellectual property valuation and transfer pricing.

By prioritizing robust risk management strategies and adapting to the changing landscape of international trade, multinationals can better position themselves to mitigate transfer pricing disputes and thrive in a competitive market.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Vernon Noronha is director at Moss Adams with expertise in transfer pricing services across a range of industries.

Felicita Moreno-Stevens is a senior associate at Moss Adams with focus on transfer pricing implications and strategies related to IP valuation and relevant tax laws and regulations.

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