Pharma’s China customs challenge

March 25, 2013

In China, the pharmaceutical and medical device industry is heavily regulated, and trade compliance can be a challenge.

Biotech companies encounter various customs issues at different stages of their evolving business. One current hot topic for these companies operating in this sector is how to deal with the customs considerations for clinical trials in China.

In this article we set out some of the issues and report on how Ernst & Young (China) Advisory Limited is taking an active role in promoting dialogue between pharmaceutical companies and the Chinese customs administration on this topic.

Chinese duty rates for trial materials

In recent years, there has been an increasing spread of clinical trials to emerging markets, such as China; the reasons for this expansion range from significantly lower per-patient costs to wider patient pools and more patients who have never previously taken drugs for treatment.

Unlike Europe and the US, dosage-form clinical trial materials are mostly subject to import duty in China. The duty rates range from 4% to 6.5% in addition to 17% value-added tax (VAT), which is mostly unrecoverable because the materials are not sold as part of normal commercial business.

Customs valuation issues

One challenging area is to provide all the necessary declaration data to import clinical trial materials into China. Considering that these are noncommercialized shipments usually not the subject of a sale/purchase transaction, the determination of an acceptable customs value can be a complex exercise since transaction value, the most widely used methodology, is not applicable.

This is a common area also observed elsewhere in the world, but the Chinese customs administration (China Customs) has recently been more active in challenging the appropriateness of the prices and may seek to apply a higher value to the clinical trial medicines.

While different companies appear to have adopted different valuation methodologies for their trial material imports — ranging from variations of cost-plus to resale-minus — import values often run into millions of dollars and must be supportable if queried by the local customs authorities.

Given the applicable customs duty and import VAT rates, this can result in significant indirect tax costs on clinical trial activities that may not have been factored into the initial budgeting process.

Dialogue with China Customs

The complications of conducting clinical trials in China generated much discussion during a recent industry forum hosted by Ernst & Young (China) Advisory Limited.

The program, which included a member of China Customs and Ernst & Young (China) Advisory Limited representatives from the Indirect Tax and Transfer Pricing practices, discussed a variety of customs duty and VAT issues specific to the pharmaceutical and medical device industry, including proactive strategies that pharmaceutical companies are seeking to adopt to deal with these issues, such as:

  • Assessing in a strategic manner the sourcing of dosage materials at the outset
  • Determining in advance the technical basis on which to assess the customs value, working in conjunction with tax and transfer pricing colleagues
  • Planning trial time scales that allow the company to take advantage of existing customs relief programs that can alleviate these costs
  • Working collaboratively with the authorities to consider introducing a duty or VAT relief on such products in the future
  • Engaging in proactive discussions with China Customs to agree to an acceptable customs valuation methodology in advance to mitigate risks and potential penalties

We anticipate more dialogue with China Customs and the industry on this topic but also through these types of events in China.

The full version of this article was first published in the Ernst & Young Indirect Tax Briefing, Issue 6, December 2012 (pdf, 4.96 MB)

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