Adapting To Change In The Era Of Tariffs, Tax And Regulatory Changes
By Christine Kachinsky
Life sciences leaders are awaiting outcomes of the Section 232 investigation concerning the national security implications of importing pharmaceuticals and related ingredients, which include finished generic and non-generic drug products, active pharmaceutical ingredients (APIs) and other raw material inputs. Those in the medical device segment are grappling with the impacts of steel and aluminum tariffs, and all segments are closely watching the reciprocal tariff landscape. These tariffs compound an impending “tax policy trifecta” now faced by life sciences companies: the 2025 expiration of provisions from the Tax Cuts and Jobs Act (TCJA), the Trump administration’s trade and regulatory overhaul, and the implementation of the OECD’s global minimum tax regime. This trifecta presents new challenges and opportunities for pharmaceutical, biotechnology, and medical device companies in this disruptive time.
The 2025 Tax Cliff
At the end of this year, over $4 trillion of tax provisions from the 2017 TCJA are set to expire. A recent KPMG survey found that 71% of C-suite executives foresee the expiration of these provisions as having a high or moderate impact on businesses, including life sciences companies. The Trump Administration is focused on extending the expiring provisions within the TCJA, and work is progressing in Congress in conjunction with budget reconciliation. Some of these provisions being discussed could become beneficial for this sector in light of recent tariff announcements, especially those that incentivize U.S. production, such as the potential for a 15% corporate rate on certain U.S. manufacturing income, as suggested during this Administration’s campaign, or the potential for bonus depreciation on new manufacturing facilities, which may take priority over a more favorable tax rate for U.S. manufacturing when scoring the new tax bill.
Other notable changes for multinationals could include an increase to the tax rate on foreign income (i.e., a “GILTI” rate increase) and reduced benefits from supplying R&D services and drug and device products to foreign markets (i.e., a reduced “FDII” rate). Some revenue raising provisions limit deductions for outbound payments to foreign intercompany debt servicers, royalty payments, and potentially even payments for purchases of drugs/devices (i.e., “BEAT” rules). There is also potential for changes to the R&D capitalization provisions of the TCJA. Instead of the current 5-year amortization for U.S. R&D, current expensing may provide some relief, especially for early-stage biopharmaceutical companies. Companies should begin modeling these impacts to avoid surprises in either their cash tax or effective tax rate positions.
Regulatory Change
The second prong of the trifecta covers regulatory disruption, some aimed directly at the life sciences industry. The Inflation Reduction Act of 2022 added costs and complexity for some life sciences companies by introducing several major changes, including Medicare Price Negotiations, Medicare Part D Benefit Redesign, Mandatory Inflationary Rebates, and Extending Subsidies. These measures aim to better control drug pricing and make medications more affordable for patients. Uncertainty about the expansion of these provisions by the new Administration has impacted strategic decisions on drug development and launch timelines.
Other complex tax regulations impacting life sciences companies, such as the corporate alternative minimum tax (CAMT) and the stock buyback excise tax, as well as R&D regulations, are in flux. President Trump issued an Executive Order to freeze and review new regulations, causing delays in finalizing proposed and new tax regulations.
An emerging and quickly evolving area of concern for drug and device manufacturers is tariffs. In addition to the Section 232 investigation specific to drug manufacturers, sweeping tariffs have been imposed on goods from America’s three biggest trading partners — Mexico, Canada, and China — and followed up with steep reciprocal tariffs on many more, including major trading partners relevant to the sector such as Switzerland, Ireland, France, Germany, and others. (As of the time of this writing, these reciprocal tariffs have been paused.) Historically, life sciences companies generally have not viewed tariffs as a significant risk because many transactions have been exempted (e.g., active pharmaceutical ingredients.) However, new tariffs on components made with steel and aluminum will prove disruptive to medical device companies, as the pharmaceutical and biotechnology segments await further guidance. Tariff situation rooms have been assembled to monitor developments, assess impacts and discuss scenarios with management, and in the boardrooms of drug and device manufacturers.
Global Tax Reform
Life sciences companies are also navigating the OECD’s Pillar Two regime, which was designed to ensure multinational businesses pay a minimum rate of 15% tax in every jurisdiction in which they operate. Despite denouncement from the Trump administration, this tax regime is being adopted by countries around the world, leading to increased reporting, more advanced data and technology needs, and more organized collaboration across organizations. The same KPMG survey found that 86% of the C-suite executives agree that complying with Pillar Two will be costly, and half aren’t prepared for its effect on operations. It will continue to be critical for life sciences leaders to stay abreast of global developments and continue monitoring the possible implications of the U.S.’s lack of support or adoption of the OECD’s tax deal.
Navigating The Tax Trifecta
The confluence of the “tax trifecta” requires life sciences leaders to remain agile and forward-thinking, leveraging strategic modeling and scenario planning to navigate the multifaceted challenges before them. By staying informed and acquiring tools to model impacts, finances, and tax, organizations will be better positioned to keep life sciences company management and their boards informed. This approach will allow them to be better business partners to organizational stakeholders responsible for efficient supply chain operations and pipeline expansion.
About The Author:
Christine Kachinsky is KPMG’s U.S. National Tax Sectors Leader and Life Sciences Tax Industry Leader, as well as a member of the KPMG U.S. Board of Directors. Christine is based in Denver, Colorado, after relocating from New Jersey where she led KPMG’s NJ tax practice. Her 30-year career at KPMG includes a number of leadership roles in the firm, as well as in client service delivery. As KPMG’s U.S. National Tax Sectors Leader, Christine is responsible for the firm’s sector-led approach to the clients and markets we serve, ensuring KPMG is bringing sector-focused insights and expertise to solve our clients’ most complex challenges. In her role leading the Life Sciences sector for tax, she leads teams providing tax, audit and advisory services to the top biopharmaceutical and medical device companies in the world.