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How M&A can play a strategic role in life sciences sector

Failure to consider the potential impact of M&A changes on global trade and VAT can lead to problems.

In brief
  • Potential Global trade and VAT implications should be considered during due diligence.
  • Life sciences companies can face an additional layer of complexity.
  • Firms in the life sciences sector often require an interim operating model.

Alex Cotopoulis, Managing Director, US VAT Practice Financial Services Lead, also authored this article.

Mergers and acquisitions (M&A) continue to be active in the life sciences sector even though volume and deal value may have fallen due to the pandemic and recessionary concerns. As highlighted in the 2023 EY M&A Firepower report, despite a downturn in dealmaking, as companies seek to secure growth through innovation, M&A will need to take a central strategic role. Global trade and value-added tax (VAT) are oftentimes not the primary focus when planning for or executing M&A strategies, but failure to consider the potential impact of M&A changes on global trade and VAT activities can lead to unforeseen risks, costs, compliance burden and liabilities for acquiring companies.

This article will explore the importance of considering potential global trade and VAT M&A implications for life sciences companies.


Chapter 1

Due diligence process

Potential global trade and VAT implications should be considered during due diligence.

While stakeholders obtain information and insights to make informed M&A decisions, historically, global trade and VAT functions have not been consistently included in due diligence. The oversight may be due to a lack of understanding of global trade and VAT mechanics or the target’s desire to maintain confidentiality. Often for trade in particular, where the trade team is embedded in a function such as supply chain, there may be a disconnect with tax and legal groups who drive the due diligence process and therefore, trade topics are overlooked.

Many times, VAT and trade topics are not considered until an audit, investigation or penalty. As a result, when trade and VAT topics are not incorporated into the diligence process and the target has import, export and/or VAT activities, significant risks may go undetected, and depending on the life sciences company’s size, scope and complexity, risks can rise to the level of materiality. The deal price can also be impacted by global trade and VAT risks identified during due diligence, which is then subject to negotiations between the parties.

While life sciences companies often have lower or even duty-free treatment for many of their products, some products do attract duties, which are often mitigated through the application of free trade agreements (FTAs) or duty mitigation programs such as foreign trade zones, duty drawback or inward/outward processing regimes. Trade risks can be material when duty-free claims under an FTA are unsupported or where duty mitigation programs have been used without appropriate controls. In recent years, the trade disputes between the US and China have resulted in punitive duties up to 25%, which if not paid, can quickly result in material amounts. Similarly, the war in Ukraine has resulted in the imposition of export-related restrictions by the US, UK and European Union countries; when not correctly adhered to, they can result in violations and even loss of export privileges. While exceptions often apply to life sciences companies that allow the continued ability to transact with Russia, the frequent changes in the rules have resulted in additional risk of potential non compliance.

Similarly, VAT risks can also rise to materiality when there is an incorrect VAT treatment applied on raw materials, active pharmaceutical ingredients (APIs), drug substance and drug products at any stage of the supply chain of a potential target. This can result in underpaid VAT, interest and penalties due to tax authorities. Such risk can have an impact on the sell side and the buy side.

On the buy side, VAT and trade risks may include successor liabilities for historical exposures and a higher purchase price if not identified during due diligence.

On the sell side, VAT and trade risks may result in the seller having to negotiate a lower sales price to reflect the potential historical exposure identified and/or the inclusion of warranties and indemnities in the sales agreement.

Consequently, the target’s global trade and VAT profile should be evaluated at the onset of the diligence process and the below topics should be embedded throughout the due diligence process.

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EY point of view: The complexity and materiality of global trade and VAT activities typically varies by jurisdiction and for companies with operations spanning the globe, they can be potentially significant in terms of opportunity and risk. A leading practice is to raise key questions during initial due diligence to identify a target’s global trade and VAT footprint to evaluate whether further review of such activities is warranted.


Chapter 2

M&A deal implications

It will be critical to determine the potential global trade and VAT implications of the transaction.

Such implications include deal parameters in each of the countries involved pre- and post-deal as well as restructuring efforts. Due to the nature of life sciences companies with multinational supply chains often with multiple cross-border movements and a variety of drugs or other life sciences products, there is an additional layer of complexity.

Deals are typically executed as an asset deal, a share deal or a combination. The key VAT aspects of share deals center around the potential VAT recovery profile on deal costs due to the VAT-exempt nature of share transactions and the use of passive holding companies, which may not be eligible to recover VAT incurred associated with the deal. The key VAT aspects of asset deals are typically more complex, including:

  • The VAT treatment of transferred assets will vary depending on whether the assets are tangible or intangible, location of the assets, the buyer, and in which country, and whether assets will be moved cross-border.
  • Whether the asset deal may qualify as VAT free Transfer of a Going Concern (TOGC) depends on whether a particular country has adopted such a regime and whether it applies to the specific transaction at hand, subject to detailed conditions to be fulfilled. In most cases, TOGC regimes are not optional and should be reviewed in detail.
  • Whether the transferred assets will be subject to any other transfer taxes such as stamp duties and business transfer taxes should also be considered.

For global trade, the starting point to determine an asset vs. a share transaction remains the same – consider where the entity acts as importer and/or exporter, evaluate any potential liability and then establish readiness to continue to transact as importer and/or exporter. In asset deals additional steps are often required for readiness where new entities are established and require setup.

EY point of view: To address VAT implications, consider including appropriate VAT clauses in share and asset deal contracts to cover pricing (VAT inclusive vs. exclusive), VAT invoicing, VAT warranties and VAT indemnities against VAT costs. From a customs perspective, oftentimes determining the import and export footprint is the most challenging aspect. Once the footprint is established, prioritizing by establishing materiality and assessing liability comes next for consideration of any potential indemnities.


Chapter 3

Readiness (pre-close)

Planning for day one readiness.

Readiness encompasses the actions that a company deems need to continue uninterrupted after cutover for operating as is or to merge with the target. While immediate readiness may be the goal, life sciences companies often require an interim operating model. These activities are typically related to obtaining appropriate regulatory approvals and licenses that are critical business needs for life sciences companies and often impact readiness. Life sciences companies should consider inventorying required regulatory approvals and licenses and remaining flexible before and after cutover to help international transactions remain uninterrupted.

Cross-border transactions add complexity and readiness planning should be tailored to address certain core issues:

  • Set reasonable expectations with internal stakeholders to allow sufficient flexibility to pivot strategies where necessary.
  • Map relevant markets including physical and transactional product and services flows.
  • Identify the use of trade and VAT deferment or savings programs and establish associated costs for operating as well as savings realized.
  • Assess third-party arrangements with customs brokers/agents, warehousing and logistics providers.
  • Establish relevant operating and governance models, including level of integration and resourcing impact and systems requirements.
  • Implement global trade and VAT compliance program.

Given that global trade and VAT are intertwined throughout a company’s global supply chain activities, coordination with other functions such as procurement, legal, and accounting/finance can help operations continue with less disruption.

EY point of view: Mapping the global trade and VAT aspects of the physical and transactional supply chain is an important step for M&A readiness. Understanding the key import and export markets, supplier and customer locations, and types of transactions allows for comprehensive planning. Access to individuals with knowledge of the activities is crucial and can be confirmed and enhanced by leveraging enterprise resource planning (ERP) and/or government-sourced data. Although these steps can be time-consuming, they can help promote a compliant and efficient transition and integration.


Chapter 4

Integration (post-close)

Integration to help a company successfully transition to its new structure.

Even small restructurings can involve unexpected or hidden risks. The integration period begins upon cutover and lasts as long as necessary for the entities to appropriately merge or combine. This period typically involves a hypercare period, when the newly formed or connected entities carefully observe the operational setup to facilitate a smooth transition. Integration varies based on the circumstances, including the timeline and what is entailed, but generally involves the aforementioned readiness considerations.

Typically, transitional service agreements between the seller and buyer are executed for the seller to provide support in certain areas until the buyer can fully take over these activities. This process may have global trade and VAT complexities to determine the potential implications from the transitional services themselves as well as a determination of the potential implications of the supply chain during the transition period. For example, the buyer may have only limited visibility into the relevant data needed for its VAT compliance reporting during the transition period, which can result in additional challenges to complete timely and accurate VAT filings.

EY point of view: Global trade and VAT activities require appropriate planning in a timely manner to reduce the likelihood of supply chain disruptions, reduce costs, and facilitate compliance. With a thorough due diligence and a comprehensive integration plan, life sciences companies can be well-positioned for transition and integration. When done well, synergies between the acquiring company and target can often be leveraged resulting in efficiencies.


Through a proactive approach, life sciences companies can navigate the M&A process, assess potential global trade and VAT risks, establish integration plans, and achieve setup without significant delays or compliance gaps. Life sciences companies that involve global trade and VAT early in the process can better allow for collaboration with the broader team and alignment with corporate objectives, which could potentially lead to areas for increased trade and VAT efficiencies or cost savings.

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