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How strategic partnerships can benefit life sciences companies

Understanding and addressing the VAT and customs aspects of strategic partnerships are essential.

In brief

  • There is a growing need for life sciences companies to enter strategic partnerships due to increased costs and a declining pipeline of new drug products.
  • Strategic partnerships can result in VAT and customs complexities, which can have significant financial impacts and high compliance risks and costs.
  • Understanding the specific details of the type of partnership can help determine potential VAT and customs implications.

Life sciences companies are increasingly turning to strategic partnerships such as alliances, collaborations, and joint ventures (JVs). In this article, we delve into the value-added tax (VAT) and customs implications of these strategic partnerships, offering insights and leading practices for life sciences companies.

Life sciences companies are bracing for a substantial patent cliff between 2023 and 2026, with over $200 billion in revenue at risk due to patent expirations and the possibility for the drug products to be replicated by generic drug product manufacturers at a lower price. This looming challenge underscores the need for innovation and development of new drug products. The lack of innovation, and increasing development costs of drug products, is causing a decline in the pipeline of new drug products as the number of new molecular entities (NMEs) and biologics license applications (BLAs) that won Food and Drug Administration (FDA) approval last year dropped to 49 (37 NMEs and 12 BLAs), from an average of 69 each year between 2017 and 2021.1

As the pipeline for new drugs narrows, pharmaceutical companies are turning to strategic partnerships to navigate these turbulent waters. According to EY research, strategic partnerships offer significant value for biopharmaceutical companies. The historical return on investment (ROI) for alliances is 33% higher than for M&A. One notable example is the collaborative effort in developing COVID-19 vaccines, emphasizing the potential of mRNA technology.2

Before addressing the VAT and customs considerations, it’s essential to understand the key types of strategic partnerships.

Types of strategic partnerships

What are they?


These involve agreements between two or more parties working together for mutual benefit with a common overall purpose and goal.


These entail multiple parties working jointly to create/produce a desired output to accomplish a task, goal or outcome that benefits the involved parties. Collaborations can be part of alliances.

Joint venture

In this scenario, two or more parties form a new entity and contribute resources such as assets, intellectual property and personnel to pursue a desired output and common goal. Each party shares profits, losses and costs.

Strategic partnerships such as alliances, collaborations and joint ventures come with their own VAT and customs challenges, opportunities, and risks.


Chapter 1

Entering alliances and collaborations

Consideration should be given to VAT and customs obligations arising for each party.

Alliances and collaborations can cover different aspects of the life sciences lifecycle, ranging from distribution rights only to manufacturing and development rights. Alliances and collaborations can be beneficial as VAT responsibilities can be shifted to either party as desired. This can be particularly beneficial when one of the parties is entering new markets or intends to introduce a new product without any existing footprint in the particular market, or when introducing a new type of product. Entering an alliance or collaboration with an established party (i.e., party that has experience and resources in the particular market or for the new type of product) with expertise may benefit both parties. We often see responsibilities among the parties split between US and non-US markets or certain geographical areas as well as certain stages within the drug product manufacturing process.

As a leading practice, responsibilities should be clearly assigned to each party, with the established party often taking the responsibility for VAT and customs requirements. This should be beneficial as the established party oftentimes already has the infrastructure in place to handle these responsibilities. An established party, for example, may already be established as an importer of record (IOR) and have an established compliance program to manage the customs and VAT filings. Depending on the types of products to be imported, the established party may already have the required permits or licenses, if any, required to import the goods or if new licenses and permits are required, has familiarity with the often-cumbersome requirements and procedures to obtain such permits and licenses.

The established party and the collaborating partner should consider transfer of title and risk of loss for the imported products based on local country requirements and, if required, the established party in return would have the rights for distribution and marketing being compensated for those responsibilities.

EY point of view: When entering alliances or collaborations, the parties should consider the associated VAT and customs implications to improve efficiencies in setting up and considering such arrangements. The established party oftentimes has the infrastructure in place to handle VAT and customs responsibilities. Addressing legal title and risk of loss arrangements in the underlying agreements and the scope of partnership helps facilitate such efficiencies.

When granting rights under alliances and collaboration agreements, VAT clauses should be considered, particularly in cross-border arrangements. Such rights are typically considered a supply of services for VAT purposes. While we typically would not expect domestic VAT to apply on the payments for granting the rights, the specific contractual terms should be reviewed and modified if needed to manage potential VAT costs or cash-flow impact.

One of the practical challenges under alliances and collaborations is the accurate assignment of the Harmonized System (HS) classification for the imported goods. In many cases, one party of an alliance or collaboration may not want to reveal sensitive information to the other party required to determine the accurate HS classification; this is often the case when dealing with “blinded compounds.” This sensitive information may include molecular information, chemical structures, formulas, structural drawings and data, or other proprietary chemical information. In such cases, the parties often enter a confidentiality agreement and, potentially, involve a third-party provider responsible for determining the HS classification. Use of a third-party provider can be beneficial as the third party will be the recipient of the confidential information required to assign the HS classification and may not disclose the confidential information to the party of the alliance or collaboration. Further, such arrangements can limit the third party to only disclose confidential information to the customs authorities, in the case of inquiries from customs authorities or customs audits. This type of arrangement may require comprehensive written procedures related to compliance.

EY point of view: When entering alliances or collaborations, the parties can benefit from entering confidentiality agreements to limit the risk of revealing confidential product information required for determining HS classifications. The parties may also benefit from engaging with a third party knowledgeable in HS classification to facilitate compliance while at the same time maintaining confidentiality.


Chapter 2

Ending alliances and collaborations

There are several factors to consider when concluding such a relationship.

The parties may eventually wish to end or change the strategic partnership due to, for example, changes in internal or external conditions or strategic objectives making it more beneficial for one of the parties to serve the market or product themselves. Consequently, when the successor party (i.e., an entity that has replaced another entity in a strategic partnership by acquiring the assets and/or carrying out the affairs of the predecessor) is not the established party, it will have to establish its supply chain and obtain the market and product rights back from the other party currently serving the market or product. In addition to customs obligations, VAT obligations also will arise for non-US markets for this party. Such considerations may include the following:

  • Registering the entity, obtaining an import number and registration.
  • Obtaining VAT and customs permits, licenses, as applicable.
  • Complying with periodic VAT filing requirements once registered.
  • Complying with customs regulations (filing import/export declarations), accuracy of all data elements (customs value, HS classification, country of origin, etc.).
  • Engaging with customs brokers or agents to assist in the filing process, obtaining bond/surety.
  • Setting up a compliance or oversight process to monitor accuracy of import/export filings.
  • Considering any duty/cost savings opportunities (such as Free Trade Agreements, Agreement on Trade in Pharmaceutical Products, Foreign Trade Zones, Inward Processing Relief, etc.).
  • Configuring enterprise resource planning (ERP) systems to generate compliant VAT and customs reports.
  • Processing VAT for accounts payable (AP) invoices.
  • Issuing VAT-compliant invoices to customers and other entities of the company group.
  • Complying with Digital Tax Administration requirements such as electronic invoicing and real-time reporting, which more and more jurisdictions are introducing.

Companies may experience long lead times and VAT and customs compliance pitfalls if the above items are not considered properly and timely putting potential go-live dates at risk.

EY point of view: Where VAT and customs obligations are not considered when setting up a supply chain, VAT and customs duties and taxes leakage may occur, which can lead to significant costs and/or cash flow issues. This risk can be managed by adding VAT and customs considerations to the agenda at an early stage of the assessment.


Chapter 3

Joint ventures

When a JV is formed by two or more parties, VAT and customs considerations will arise.

Depending on the jurisdictions and activities involved, the JV may be considered a taxable person for VAT purposes. That means that the JV itself needs to comply with VAT obligations, i.e., obtain VAT registrations and receive and issue invoices with or without VAT under its own VAT number.

The parties forming and investing in the JV through the provision of resources and finances are oftentimes considered taxable persons for VAT purposes themselves particularly where they have activities other than just being a pure shareholding entity. Based on the above, the transactions between the parties and the JV might be in the scope of VAT.

From a customs perspective, there is a set of prerequisites for newly established JVs (given that a new JV does not have the infrastructure to handle customs responsibilities), which often coincide with those required for a “successor” entity as described above.

EY point of view: Consider VAT and customs obligations for setting up a JV and the taxable status of the JV entity itself. These considerations are oftentimes overlooked and can result in risks such as costs and time-consuming efforts to resolve the situation retrospectively.


Chapter #4

Leading practices in VAT and customs

Strategic partnerships can be complex from a VAT and customs perspective.

Below are some leading practices for life sciences companies engaged in strategic partnerships:

  • Early involvement of VAT and customs professionals: Collaborate with VAT and customs experts during the planning phase of a strategic partnership.
  • Comprehensive partnership review: Understand the type of strategic partnership and its VAT and customs implications, and assess the partnership’s details to identify VAT and customs issues.
  • Proactive risk management: Address potential VAT and customs risks in the underlying partnership agreements.
  • Consider exit strategies: Think ahead about the implications of exiting or changing the scope of the partnership, especially in terms of VAT and customs.


In the life sciences industry, strategic partnerships are becoming vital to successfully navigate potential challenges like the patent cliff and rising development costs. Understanding and addressing the VAT and customs aspects of these partnerships are important to financial efficiency and compliance. By implementing leading practices and involving VAT and customs experts, life sciences companies can improve their strategic alliances while managing potential risks.

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