MedTech’s growth spurs new indirect tax challenges amid global regulatory changes and resource limitations
The emergence of new trends now has serious implications for medical technology (MedTech) companies and their ability to maintain compliance with indirect tax (IDT) rules and regulations. Compliance has traditionally been a complex undertaking for the MedTech industry, but the advent of advanced, integrated technologies and global business operations are introducing additional considerations that must be addressed.
Over the past decade, the MedTech industry has experienced significant, steady growth. In 2023, the industry reported US$23.9 billion in dividends and share buy backs — the second highest ever recorded according to the Pulse of the MedTech Industry report published by the global EY organization. With this growth, there is a proliferation of hundreds of intricate categories of diagnostic and patient treatment medical equipment.
Corporate tax departments also must contend with limited resources, including budget constraints and a shortage of skilled professionals. They must balance the need for compliance and implementation of the optimal tax strategies, while keeping up with constantly evolving rules and rates for sales and use tax (SUT), consumer use tax (CUT), value added tax (VAT) and other goods and services taxes (GST) across the globe.
Highlights:
|
Jump to ↓
Trends and considerations that make IDT compliance challenging for MedTech companies
1. Emerging technologies. The rapid advancement of medical technology has introduced a range of new products that do not necessarily fit into existing tax classifications. For example, digital health tools, AI-driven diagnostics and software as a medical device (SaMD) are increasingly common in the MedTech industry. These innovations blur the lines between traditional goods and services, making it difficult to determine the correct tax treatment.
Some jurisdictions may tax software differently from hardware, while others might treat certain digital health tools as exempt from VAT if they are deemed necessary for patient care. The challenge lies in navigating these distinctions and staying up to date with how various governments classify and tax emerging technologies.
2. Shift to value-based care. The transition from fee-for-service to value-based care models is reshaping how medical technologies are delivered and paid for. Value-based care focuses on patient outcomes rather than the quantity of care provided, meaning that MedTech companies are increasingly being paid based on the value their products provide over time rather than on a per-unit basis.
This shift often involves bundling equipment with performance-based service agreements, creating indirect tax complexities. Determining whether such arrangements should be taxed as the supply of goods, services, or a mix of both becomes challenging, especially across borders where different countries apply different tax treatments to services and goods.
3. Data access and connectivity. Many modern medical devices are now connected to the cloud, enabling continuous data exchange, remote monitoring and real-time diagnostics. These connected devices, while highly beneficial to patient care, add new layers of complexity to IDT.
Some devices may require ongoing software subscriptions, cloud-based services or data analytics, which could be taxed as digital services rather than physical goods. Determining the taxable value of such products and services can be difficult, especially when data services cross international borders and trigger additional tax obligations like digital services taxes (DST) or telecom-specific levies.
4. Cross-border transactions. MedTech companies often operate globally, with production, distribution, and sales spanning multiple countries. Cross-border transactions complicate IDT calculations because each jurisdiction may have different VAT, GST or sales tax rules. Import and export duties can apply, along with reverse-charge mechanisms, zero-rated goods, or special exemptions for medical products.
Determining the correct tax treatment requires careful consideration of each country’s tax regulations, ensuring compliance in a landscape where even slight regulatory differences can lead to penalties, back taxes or double taxation.
5. Bundling of goods and services. MedTech products are increasingly being marketed not as standalone goods but as part of comprehensive service packages that include maintenance, technical support, training and even outcome-based guarantees. These bundles pose significant challenges for IDT calculations because different elements of the package may be subject to different tax treatments.
While the physical medical device might be subject to a reduced VAT rate as a healthcare-related good, the accompanying support services may be taxed at a higher rate. Accurately allocating the value of each component and applying the correct tax treatment requires robust accounting practices and often results in tax audits to ensure compliance.
6. Changing global trade policies. As geopolitical tensions and trade agreements evolve, the global landscape for IDT is constantly shifting. Tariffs, import and export duties and local taxation rules can all impact the way MedTech companies structure their operations.
Trade policy changes may result in new duties being applied to goods that were previously duty-free or cause certain medical devices to lose their preferential tax treatment. These changes require MedTech companies to stay agile and informed, as failure to comply with new trade and tax regulations can lead to disruptions in supply chains and unexpected financial liabilities.
7. Differing tax treatment of medical supplies. Medical supplies and devices often receive special tax treatment in various jurisdictions. For example, certain consumable medical products such as syringes or bandages might be subject to reduced or zero-rated VAT as part of a government’s public health policy.
However, qualifying for these exemptions can be difficult, as the criteria vary from one country to another. What qualifies as a tax-exempt medical supply in one region may not be applicable in another, forcing MedTech companies to carefully track and classify their products according to local laws.
8. Taxation of intangibles and licensing. MedTech companies frequently rely on intellectual property (IP), such as patents, licenses, and trademarks, as a core part of their business model. The taxation of these intangibles, especially across borders, introduces additional challenges. Countries differ in how they tax royalty payments, licensing agreements, and IP transfers.
For instance, licensing medical technology to foreign distributors or partners could trigger withholding taxes. Determining whether these intangibles should be taxed under the rules for services, digital products or other categories adds a new layer of difficulty.
 |
|
Reduce complexity and increase efficiency through technology and automation
More than one-third (37%) of respondents in the Thomson Reuters 2024 Challenges and Changes in Indirect Tax & Compliance report said that staying compliant amid rapidly changing tax laws throughout multiple jurisdictions remains a significant concern. It’s simply more data than current processes are equipped to handle.
In fact, among IDT department respondents, more than 40% believe that it is critical to adopt the right technology and automation to keep up with regulatory changes and to be an effective function within the organization. Respondents also cited resource constraints as a top concern, specifically an ongoing shortage of qualified staff. Indeed, almost 4 out of 10 respondents (39%) said their department was already feeling the effect of resource constraints.
According to the latest EY Tax and Finance Operations Survey, tax personnel currently spend nearly half of their time (45%) on routine compliance work, which includes data collection and cleansing, tax return compliance and related reconciliations. Another 35% is spent on core activities, such as reviewing and signing corporate tax returns, managing tax advisory work, managing risk and communicating with stakeholders. Meanwhile, tax practitioners spend just 20% of their time on higher-value work such as data analysis, tax planning, managing tax controversy, general strategy, communications and risk management.
By adopting the right technology, tax departments can accomplish several goals at once: make the most of their existing resources — including upskilling workers, keeping up with constantly changing tax rules and regulations, increasing time for higher-value work and adding greater speed and accuracy in their tax reporting.
Thomson Reuters ONESOURCE Indirect Compliance streamlines the tax compliance process with real-time tax rates and rules, customizable tools and support for e-filing — plus powerful data reconciliation, adjustment and reporting capabilities. This single, centralized solution lets you move beyond complex, country-specific spreadsheets to help you stay compliant wherever you do business internationally.
Leveraging Thomson Reuters tax technology with EY industry knowledge
The alliance between Thomson Reuters ONESOURCE and EY Tax Technology and Transformation services aims to reduce the MedTech industry’s compliance challenges. The leading global tax and accounting technology of Thomson Reuters combined with the tax knowledge and global network of the EY organization offers integrated and agile technology solutions. This collaboration leverages cloud and secure access platforms to transform how tax departments solve problems, source business alternatives and interact with tax authorities, ultimately advancing clients’ business strategies in the digital age.
The combined expertise of the global EY organization and Thomson Reuters tackles multinational clients’ most pressing data challenges through intelligent automation and enables efficient, insightful reporting with our industry-leading ONESOURCE suite. This collaboration provides a tax function that is intelligent, agile and forward-thinking — harnessing the power of data, integrating effortlessly and fostering innovation-driven growth. This empowers MedTech enterprises to focus on innovation and patient care, providing confidence that their indirect tax obligations are managed efficiently.
Learn more about Thomson Reuters ONESOURCE Indirect Tax Compliance solutions.
 |
|