The unintended consequences
The effect on clinical trials soon became a core concern for Slovakia’s Association of Innovative Pharmaceutical Industry. Richard Panek, Tax Partner, Ernst & Young, s.r.o., explains: “In some areas the tax made sense, but in others it had serious unintended consequences – in particular in the field of clinical trials. As a tax on gross revenue, it took no account of the costs of clinical trials, such as blood tests and lab work. Implementing it would have caused major cash-flow problems for doctors – and ultimately stopped the trials.
“The effects would have been serious for patients – who would no longer have access to experimental and potentially life-saving drugs – and also for the industry, diverting some €30m R&D spend annually to other countries.”
Communication was the best medicine
Slovakia’s Association of Innovative Pharmaceutical Industry reached out to EY for help. The first step was to create a working group to bring the industry association and government together in an open and inclusive way, and to help both parties work together to understand the issues and develop a solution.
The team developed case studies and conducted detailed technical tax research to illustrate what would happen to clinical trials in the country if the tax went ahead as planned. This led to a new approach which offered several important exceptions to the new tax ruling, including for clinical trials. The R&D spend, the jobs of healthcare professionals and researchers, and access to potentially life-saving drugs were preserved.
“Public health policy, funding, regulation and taxation is one of the most delicate ecosystems in terms of government-industry relations,” Panek says. “But even here, the Slovakian example shows that when tax or regulatory changes have complex and unintended consequences, the best approach is to facilitate a conversation with the regulators in order to find a solution suitable to all.”