Taxing Times for French Pharma

The French pharmaceutical sector is a recognised force within the healthcare system. As well as representing a source of medicines, it is a major employer and contributor to the economy. However, the pharmaceutical industry has grown increasingly concerned that its contributions to the nation are being taken for granted and has been using the French Presidential campaign as an opportunity to highlight its views.

Nathan Jessop

On 1 March, the Alliance for Research and Innovation in Health Industries (ARIIS) issued a petition asking all presidential candidates to support the industry in the national interest (1). ARIIS represents a collaboration between different companies in the healthcare sector, pharmaceutical and diagnostic, to make the sector a greater priority for the government. Since political candidates are engaging with French businesses about how to revitalise the faltering economy, the pharmaceutical industry hopes that its views will make an impact. Even the Socialist party, which has argued for more intensive cost cutting in the healthcare sector, has met with representatives of the pharmaceutical industry.

Unfairly targeted?

Pharmaceutical companies operating in France have long expressed concern that they are being unfairly targeted by the government as part of its cost-containment drive to reduce healthcare expenditure. According to the French pharmaceutical industry association, Les entreprises du médicament (LEEM), which represents more than 270 pharmaceutical manufacturers nationally, price cuts in 2011 cost the industry €1 billion (2). It also suggested that cost-containment policies dissuade companies from making further investments in France and that companies are already looking at cutting jobs – although it has declined to name which companies.

A longstanding complaint has been that, over the past two decades, a series of taxes have been introduced with a specific focus on the pharmaceutical industry. LEEM has calculated that these measures account for 5.5% of annual turnover, in addition to other burdensome levies imposed upon all industrial sectors (2, 3). Officially, the taxes are described as "contributions", and were introduced to reduce the French health system's huge deficit, for which the pharmaceutical industry was partly blamed because of high product prices (4). Pharmaceutical companies have rejected such accusations, pointing out that since they must negotiate in advance with the government about product pricing, the government is fully aware of, and involved in, the decision-making. The industry believes that the government should pay more attention to the non-pharmaceutical costs within the healthcare system.

Pharmaceutical-specific tax rates have increased steadily, and are likely to continue to do so for the foreseeable future. They secure substantial revenue for the government, which is struggling to deal with the eurozone crisis (highlighted by the January 2012 loss of its top AAA credit rating from Standard & Poor [5]). These types of industry-focused taxes are likely to continue in a bid to avoid imposing tax rises on the general population. Currently, 13 pharmaceutical-specific taxes generate vital revenue for the government, but are an irritant to the industry since they can represent between 50% and 100% of companies' annual corporate income tax (4, 6).

The Promotion Tax is a tax on promotional expenses for medicines that have a marketing authorisation in France and are included on the official list of reimbursed medicines. As the government reimburses much of the product costs in France, there has been a steady drive to curtail the promotional activities of pharmaceutical companies, with the costs associated with medical representatives, such as salaries, being a favoured tax target. Initially, the Promotion Tax rate was set at 5%, but it is now charged at 19–39%, depending on the nature of the company's promotional expenses. Currently, it brings in between €130 million and €165 million per year for the government. The types of activities deemed eligible for the tax are frequently disputed between the industry and the government. For example, the government stated that all advertising would be subject to Promotion Tax and indicated that this even included pens and giveaways bearing logos and trademarks at conferences (4).

Not surprisingly, the level of promotional activities has sharply declined because of a combination of government pressure and company desire to minimise their exposure to such taxes and other restrictions. Recently, a proposal to allow limited television advertising for over-the counter medicines was rejected at a joint industry–government forum, as the two parties could not agree about how such measures should be governed (7).

One general criticism of the Promotion Tax is its lack of clarity and ambiguous wording, about which certain companies have challenged the government. For example, a number of disputes have centred on the term 'medical representatives'. In 2009, Janssen-Cilag successfully argued in court that the Tax could not be applied to medical representatives who had not yet graduated (4). The government continues to challenge this ruling, arguing that the Law did not specifically set out to exclude medical representatives who worked in the absence of any graduate qualification or diploma. It believes that professional experience should be considered in the same manner as an official qualification.

Another pharmaceutical tax (introduced by Article 12 of the law for Health Insurance Financing of 2004) is levied on sales of pharmaceutical products, and nets annual revenue from €215 million to €250 million. This tax is charged at 1%, but does not apply to exported, generic and orphan products. Since 1999, companies have also had to pay a tax on the basis of the annual increase of sales to prevent an unaffordable increase in health expenses caused by product sales. The nature of these payments is determined by confidential negotiations with the government.

Government response

The pharmaceutical companies continuing complaints against the tax system appear to be making their mark on the government, which is worried that companies are reducing their investment in the French market. In 2009, the French President, Nicolas Sarkozy, gave a keynote speech to the Health Industries Advisory Board (CSIS), in which he publicly acknowledged that healthcare expenditure could not be viewed solely on the basis of cost containment (8). The pharmaceutical industry was heartened that this might signify a shift in government attitudes to the sector, and as far as the taxation issue goes, there have been positive developments. The CSIS was set up in 2004 and usually meets under the chairmanship of the French Prime Minister, who works below the President, as an open forum for the industry and government to air their views about the operational environment.

In January 2012, the CSIS reviewed the tax system and agreed that a simplification of the various measures was required (2, 7). It recognised that the industry's views were not being taken into account, and that some of the tax provisions did not appear to align with other branches of government policy to stimulate industrial competitiveness.

The French government has been particularly keen to promote biotech SMEs and has been particularly worried that the taxation system may stifle growth of this emerging sector. After its latest meeting, the CSIS recommended that the General Inspectorate of France and the General Inspectorate of Social Affairs should examine how other countries are taxing the pharmaceutical industry and apply their findings to the French market to incentivise companies toward local investment. The audit and development of recommendations to be implemented by these bodies has been set for 2013 (7), although it is unclear whether the election will influence this timeline. The pharmaceutical industry has also complained about the changing rates of pharmaceutical taxes and hopes that the future recommendations will also feature stabilisation of the tax levels (2).

Outlook

The French pharmaceutical industry has been taking advantage of the Presidential political campaign to reiterate its calls for more favourable policies for the sector and to boost its public image following the recent Mediator scandal (1, 2, 7). To date, it has been worried by the narrow focus on cost containment by successive governments, which is most apparent in the form of 13 different taxes on the pharmaceutical sector. The pharmaceutical industry believes that encouraging pharmaceutical innovation is the best means for the government to help revive the economy, since improvements in healthcare affect the population at large.

Although the current government has altered its stance in public to become more positive about the industry, it still has to make difficult cost-cutting decisions to deal with eurozone crisis. In fact, the French Finance Minister François Baroin was quoted, prior to the election, as stating that the government would not back down from a policy of containing medical spending (2). Any incoming French government will face the same financial challenges. Since considerable revenue comes from the long-standing taxation measures, it is unlikely that reform will be quick or to the satisfaction of the pharmaceutical industry. The government dilemma is that the slowing economy has already reduced revenue from corporate sources.

Companies have warned that they may reduce their investment in France on the basis of unfavourable operating conditions. However, they face similar cost-containment pressure in other European markets as their respective governments are also dealing with the global financial crisis. They may not be able to offer sufficiently attractive incentives to prise companies away from the French market.

References

1. ARIIS, "Pétition d'ARIIS pour les présidentielles 2012" (ARIIS Website, 2012). www.ariis.fr, accessed 4 Apr., 2012.

2. A. Torsoli, "French Drugmakers Say Pricing Policy May Hamper Industry" (Bloomberg Website, 2012). http://mobile.bloomberg.com, 4 Apr., 2012

3. The Pharma Letter, "Tax system for French drug firms to change" (The Pharma Letter Website, 2012). www.thepharmaletter.com, accessed 4 Apr., 2012.

4. J. Cuadrado and C. Damiano, "French taxes specific to the pharmaceutical industry: cutting the health expenses or a different way of taxing the profitability of the pharmaceutical industry in France" in Tax on Transactions multi-jurisdictional guide (Practical Law Company Website, 2011). http://crossborder.practicallaw.com, accessed 4 Apr., 2012.

5. Anon, "France loses AAA rating as euro governments downgraded" (BBC News Website, Jan. 12, 2012). http://www.bbc.co.uk/news/business-16552623, accessed 4 Apr., 2012.

6. H. Israël and C. Guionnet-Moalic, "France: How the Reform of the Tax Applicable to Pharmaceutical Product Turnover Will Affect Entities in this Field" (mondaq Website, 2005). www.mondaq.com accessed 4 Apr., 2012.

7. CSIS, Meeting of the Health Industries Strategic Advisory Board (Ministère de l'Économie, des Finances et de l'Industrie website, 2012). www.economie.gouv.fr, accessed 4 Apr., 2012.

8. Focus Reports, "France: The French Revolution" (Focus Reports Website, 2010). www.pharma.focusreports.net, accessed 4 Apr., 2012.