Life science organizations are no strangers to meticulous, precise, complex processes to ensure success. There is zero room for error, including financial planning and management. However, when it comes to VAT (value-added tax) recovery, many pharma and biotech companies fall victim to significant losses slipping through the cracks each year.
There is no doubt that the reclaim opportunities exist. In fact, we wouldn’t be here if it didn’t. Having reclaimed more than €53 million in foreign VAT for pharmaceutical companies alone, we often find that most companies barely scratch the surface when it comes to reclaimable accumulated funds.
So, why are so many organizations settling for a fraction of what’s rightfully theirs?
Despite best efforts, some costs are more challenging to uncover and recover, especially in niche life sciences organizations. Add the additional complexities that come with navigating country-specific VAT legislation, strict compliance and deadline criteria, and transaction volume, and you’ve got your answer.
So how can pharma and biotech businesses elevate their finances and maximize their reclaim potential without succumbing to the common pitfalls of VAT reclaim processes?
We’ve got you (re)covered. But first, let’s go over the groundwork.
Two overarching types of VAT recovery may apply to your business. The type of recovery solution is determined by where the business expense took place.
| Domestic VAT recovery | Foreign VAT recovery |
| Domestic VAT, also known as input VAT, refers to all value-added tax that a business incurs within a country where they are VAT-registered. For large organizations, this can often include multiple countries. | Foreign VAT recovery is a specialized VAT scheme that allows non-resident companies to claim the VAT portion on international expenses without needing to register within the country they are claiming from. |
Even though there is an undeniable opportunity to maximize savings and elevate your finances, up to 54% of eligible VAT still goes unclaimed by organizations. Why? Domestic VAT recovery is known for being a resource-intensive process, especially considering the significant scope of individual eligible transactions that are hard to find without the right data.
In addition, as a business grows, so do the VAT-registrations and managing VAT processes in multiple countries becomes an administrative and compliance nightmare. In addition, even if transactions are identified, manual processes still plague modern finance teams, who are tasked with combing through thousands of invoices to assess compliance and eligibility.
To add to the complexity of local returns, organizations must adhere to the local registration requirements, deadlines, and invoicing instructions per VAT registration. This process is prone to error and often comes at the expense of your capacity, people, and patience.
This tricky landscape often leads to two common errors that limit a company’s VAT reclaim potential.
Overclaiming VAT
As VAT registrations increase, managing compliance and eligibility requirements becomes all the more demanding. This often leads to companies including non-deductible expenses in their local returns, leading to rejected claims and exposing them to potential penalties, fines, and audits. Not to mention the loss of resources and time when having to submit claims.
Underclaiming VAT
Due to the resource-intensive nature of managing input VAT processes and maintaining compliance, companies often lack the time or expertise to maximize their input VAT potential.
Fortunately, we exist, so these challenges don’t.
Our Domestic VAT solution backs you out of the compliance corner and allows you to streamline the local return process without the heavy lifting.
Our local reclaim solution provides human expertise with digital accuracy to assess and review all transactions for eligibility and compliance with country-specific local legislation in an error-free and quick turnaround. Reclaim the VAT element of travel and entertainment, accounts payable, and import VAT transactions incurred within the country of VAT registration.
Foreign VAT, also known as international VAT, is a common value-added tax included at a country-specific rate on most goods and services. Many life science organizations incur VAT on international business spend. Foreign VAT recovery encapsulates the process of reclaiming the VAT portion on all eligible international business expenses.
This can range from intercompany invoices to common high-value foreign accounts payable and allows a non-resident entity to claim VAT abroad without being VAT registered in the country where the costs are incurred.
Although the reclaim opportunity is bountiful within the life science sector, the reclaim potential of common high-value expenses is commonly overlooked. Despite efforts, some costs are more challenging to uncover and recover, especially in niche world of life sciences organizations. Fortunately, we’re here to help identify some of the most valuable sources of refundable VAT in the pharma and biotech industry.
VAT on tooling and molding is one of the high costs recoverable within the international VAT scope. Value-added tax is often a large portion of the already high set-up cost required for production and molding tools and machinery. Often pharma and biotech companies own the production and molding equipment (although it may be located in the supplier company). As a result, the VAT incurred on the purchase of tooling parts may be eligible for VAT recovery, ultimately cutting tooling and molding costs by up to approximately 25%.
Clinical trials are a critical yet costly stage of the later Research and Development stage. It often includes high-cost materials which are challenging to source, including medicines and biological materials such as plasma and tissue samples.
Due to the globalization of clinical trials, there are many financial and contractual VAT implications that are nuanced from country to country. In addition, conducting clinical trials in multiple jurisdictions frequently involves contracting out specialist professionals or hiring local staff. Within the scope of clinical trial expenses, import VAT can also play an important role. Generally, pharmaceutical products that need to be tested will be imported to the country where testing takes place, creating an opportunity for import VAT recovery.
Needless to say, the VAT incurred throughout the process is often complex and spread out across various accounts payable and multiple countries. However, although there is no commercial sale, there can still be significant VAT obligations and custom valuation challenges. Despite these challenges, up to approximately 25% (in the EU) of associated VAT costs can be recovered.
Up to 12% of all congress spending can be attributed to reclaimable VAT. Many organizations within the life sciences sector utilize international opportunities to drive new business growth and connect with stakeholders. Trade Shows, meetings, events, and conferences in the pharmaceutical industry generate colossal spending. This includes VAT on event registration, attendance fees, transport costs, and accommodation.
Maximizing the reclaim opportunity requires an in-depth understanding of your specific industry, as well as the VAT landscape and how it applies to your particular use case relevant to each specific country you conduct business in. Each industry has its own unique scope regarding high-value expenses and whether or not they are eligible for VAT recovery. In the pharma industry, high-value additional expenditures include
Most multinational pharma companies only scratch the surface regarding VAT recovery. One of the lesser-known but significant sources of refund potential lies within Travel and Entertainment spend. Travelling employees incur straight travel expenses and incidentals. Pharma companies can reclaim these business-purposes expenses related to Travel and Entertainment, whether domestic or foreign. These costs include hotels, accommodation, fuel, car rental, entertainment, restaurants, and public or private transport.
Although the advantages of a greater VAT yield are significant, it’s also important to understand the impact that unsuccessful returns can have on your business. Returns that are prone to errors or do not comply with the relevant requirements per country-specific legislation not only lead to lower recovery but ultimately put you at higher risk for audits by VAT authorities. Although there is no standardized VAT return process, there are a few key considerations to keep in mind that will aid the process and optimize your recovery.
The VAT reclaim opportunity is too significant to leave to guesswork. Instead, free your team from the administrative burden of the VAT reclaim process while getting your money back. Our VAT experts are experienced in pharmaceutical VAT recovery and consolidate local and international returns in one centralized solution.
Drive transparency and control throughout your organization through confident and seamless VAT reclaim, allowing you to boost reclaims, uncover hidden VAT and reshape contractual and service structures within your pharma organizations and supplier landscape.
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