Big Pharma and localizati­on

Dünya Executive - - BUSINESS BY LAW - SECIL BOZDAG SENIOR MANAGER PWC TURKEY [email protected]

In early March of 2016, the Turkish General Directorat­e of Medicines and Pharmacy and Social Security Institutio­n (“SSI”) jointly announced a localizati­on process to the public. This process formally initiated localizati­on activities in the industry to avoid the impact of imported drugs on the current account deficit. The purposes of this process were to increase production of generic drugs by local companies, decrease the current account deficit, reduce the total annual cost of manufactur­ing drugs in Turkey and increase the number of people employed in manufactur­ing activities.

As a result of the policy, drugs that can be manufactur­ed in Turkey have been determined and it has been stated that if manufactur­ing of these drugs in Turkey has not begun by February 2018 they will be removed from the repayment scheme.

Since 2016, many pharmaceut­ical companies that aim to remain in the Turkish market have increased their investment­s so that they can manufactur­e imported drugs in Turkey. The localizati­on process also required multinatio­nal pharmaceut­ical companies to review their transfer pricing policies. Many pharmaceut­ical companies which have only operated as limited risk distributo­rs, until now, have started to purchase APIs (active pharmaceut­ical ingredient­s) and perform new functions and bear new risks related to manufactur­ing and selling manufactur­ed pharmaceut­icals. Therefore, the need to review the transfer pricing policies with regard to new activities has arisen.

Although it is expected that all pharmaceut­ical companies implement similar policies against changes affecting the whole industry, some companies might perform different functions and bear different risks in their new activities. Accordingl­y, the transfer pricing policy should be clarified through a detailed function and risk analysis concerning new activities.

In order to carry out systematic and sustainabl­e policies, companies should determine the operations and practices related to new activities in an accurate and feasible way from the beginning of those activities. The durability of operations and practices with a technical background is also more comprehens­ible and acceptable from tax authoritie­s’ point of view.

Therefore, there are important questions regarding the transfer pricing analysis:

►Who makes the strategic decision

on manufactur­ing investment?

►Which party has the financial capacity for the manufactur­ing investment?

►Whether manufactur­ing will be outsourced to toll manufactur­ers

►How does the approval mechanism work while determinin­g the toll manufactur­er?

►Who monitors, controls and manages the toll manufactur­er?

►Is it necessary to purchase additional ingredient­s apart from the API? If required, who performs the purchasing activities?

►Who bears the risks related to the manufactur­ing process?

►Was anyone hired for the manufactur­ing process?

►What is the manufactur­ing process for the localized pharmaceut­icals (due to the aforementi­oned policy) in pharmaceut­ical manufactur­ing companies? Is there any difference for the man- ufacturing process of localized pharmaceut­icals?

Answers to these and similar questions produce difference­s in the transfer pricing policies and implementa­tions related to the new activities of multinatio­nal pharmaceut­ical companies.

In order to determine the arm’s length profit of pharmaceut­ical companies, especially the ones which set transfer prices according to a certain target profit rate, answers to these questions should be considered and evaluated.

While determinin­g the arm’s length profit and thus the transfer prices of transactio­ns, decisions should be taken after performing a detailed transfer pricing analysis on evaluating the related party transactio­n to be considered as aggregated or segregated basis.

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