With the regulatory landscape shifting fast, the reporting requirements will only increase. As discussed above, life sciences is a highly profitable sector, which leaves it exposed to tax legislative changes and to increased levels of controversy, as governments seek to recoup tax revenues in the wake of COVID-19 recovery and amid other disruption.
Yet the digitalization of reporting will also be important here. Complying with increasingly common digital tax filing requirements will further increase the workload, cost and risk profile of the life sciences tax and finance function.
According to the EY TFO Survey, companies are responding with an estimated average spend of $10.6m in tax technology over the next five years, while many are also turning to third parties for support – with 46% saying that the most significant benefit of partnering with a provider to co-source their multi-country tax compliance and statutory reporting activities is reduced risk, followed by cost reduction (31%).
The technology challenge
As well as tax authorities demanding increased volumes of digital data, some in real-time, companies in the sector can expect huge pressure in the system due to the volume of data and required calculations from a raft of new regulations.
“Large multinational companies are already now having to access, transform and extract insights from significant volumes of data that they've not historically had to think much about,” says Rick Fonte, EY Global Health Sciences & Wellnesss Tax Leader. “Can they even access that data from their current systems efficiently? If so, can they transform and organize the data so that it’s usable across all provision, planning and compliance processes – so people can actually make sense of it and draw meaning from it?”
Companies on average already spend 40-70% of their time on gathering and making data useful – a data point that seems so contradictory to the automation capabilities available today. “Once you take into account BEPS 2.0 and ESG, the data challenge becomes more complex and onerous,” Fonte adds.
While automation is one of the key enablers, current technology uptake among life sciences organizations generally lags. For instance, only 27% use cloud-based platforms extensively, and only 20% use automation extensively. Many IT systems and processes were set up for how finance runs the business, not taking into consideration the granularity of the data and reporting required for tax.
Many organizations will be looking to upgrade their ERP systems in the near future. In response, life sciences tax functions need to ensure their data and technology needs are communicated and incorporated into the early planning phases of any ERP project. “This isn’t a tax department problem; it’s an overall company problem,” says Ronald van den Brekel, EY Global Head of Transfer Pricing Strategy and Innovation. “The data sources are going to come from finance, HR and legal, and the systems need to be built to accommodate that fact.”
Tax teams have an opportunity, through these upgrades, to create the proper tax detail. Take, for example, stock keeping unit (SKU) level pricing inclusive of full transfer pricing being developed into the ERP. Doing so also benefits the broader business by helping functions including financial planning and analysis be able to forecast profitability more accurately.
Then there’s the co-sourcing option. According to the EY TFO Survey, the most significant benefits of partnering with a provider to build a comprehensive data and technology transformation strategy and solution for the in-house tax function are reduced tax risk profile (48%) and increased value (29%).
“Nobody’s going it alone, nor should they be, let’s put it that way,” says Fonte. Some of the biggest organizations who still have well-funded and resourced IT and technology infrastructures may try to build new solutions themselves, he says. But even they are relying much more heavily on external advisors and third-party tools, especially in light of the requirements of BEPS 2.0 Pillar 2. “The tax rules are too complex, they are changing quickly. As a result, it is often expensive and too risky to internally build and maintain custom in-house solutions.”