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22nd Annual Health Sciences Tax Conference Above the line state and local considerations: why should you care? December 4, 2012

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Hear the recent developments within the indirect tax arena, focusing on employment, sales and use and property taxes.

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Page 1: State and local tax considerations

22nd Annual Health Sciences Tax Conference Above the line state and local considerations: why should you care? December 4, 2012

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Disclaimer

► Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

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Disclaimer

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. For more information about our organization, please visit www.ey.com.

This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party.

Views expressed in this presentation are not necessarily those of Ernst & Young LLP.

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Presenters

► Steve Rauch Global Tax – Indirect Tax and Incentives Pfizer, Inc. [email protected]

► Ed Grimes Director of Tax Cordis Corporation [email protected]

► Michele Raber Ernst & Young LLP Iselin, NJ +1 732 516 4786 [email protected]

► Rebecca Truelove Ernst & Young LLP

New York, NY +1 212 773 8028

[email protected]

► Jennie DeVincenzo Ernst & Young LLP

Iselin, NJ +1 732 516 4572 [email protected]

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Today’s agenda

► Overview ► Employment tax ► Property tax ► Sales and use tax ► Credits and incentives

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Overview

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Ernst & Young LLP/COST FY 2011 50-state business tax study

► Ernst & Young LLP’s 10th annual study of total state and local business taxes, produced in conjunction with the Council on State Taxation (COST): ► Examines business tax trends and provides estimates of the level

of business taxes in each state, including indirect taxes and local taxes

► Provides insights to frame state business tax reform discussions ► Provides the only comprehensive estimate of total state and local

taxes paid by business

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The big picture Composition of total state and local business taxes, FY 2011

38.0%

20.1%

12.6%

7.2%

6.4%

5.6%

10.0%

Taxes on business property

Sales tax on business inputs

Excise, utility and insurance taxes

Corporate income tax

Unemployment insurance tax

Individual income tax on business income

Business license and other Note: figures may not sum due to rounding. Source: Ernst & Young LLP estimates based on data from the U.S. Census Bureau, state and local government finances.

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How much state and local tax did business pay in FY 2011?

Business tax FY 2010 (US$b)

FY 2011 (US$b)

2011 % total

taxes

One-year

change Business property taxes $248.6 $244.9 38.0% -1.5% Sales taxes on business inputs 123.3 129.7 20.1 5.2 Corporate income tax 42.7 46.3 7.2 8.5 Unemployment insurance 32.4 41.2 6.4 27.1 Business and corporate license 37.0 37.3 5.8 0.9 Individual income tax on passthru 33.0 36.3 5.6 10.0 Excise taxes 30.5 35.0 5.4 14.9 Public utility taxes 28.9 28.8 4.5 -0.3 Insurance premiums taxes 16.6 17.2 2.7 3.6 Severance taxes 11.3 14.8 2.3 30.9 Total business taxes $616.0 $643.9 100.0% 4.5%

Total state and local business taxes, FY 2011

Note: Figures may not sum due to rounding.

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State unemployment insurance (UI) trust fund debts still significant

► Many states still face enormous UI trust fund debts.

► 10 states account for 80% of the debts; California accounts for 30%.

► North Carolina and Indiana have the largest debts relative to the size of their current business taxes.

► States are responding by increasing UI contribution rates and taxable wage bases.

► If these debts were paid off in the next year through UI or other business tax increases, total business taxes would rise by more than 10% in CA, PA, NC, IN and KY.

State

UI debt as of June

2012 (US$b)

% of FY11 business

tax California $8.8 10% New York 2.8 4 Pennsylvania 2.5 10 North Carolina 2.5 19 Ohio 1.8 9 Indiana 1.7 17 Illinois 1.1 4 New Jersey 1.0 5 Kentucky 1.0 14 Wisconsin 0.9 9 Other states 5.1 1 Total $29.3 5%

Note: Figures may not sum due to rounding.

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2012 state budget surpluses

National Council of State Legislatures, Morgan Stanley Smith Barney, Ernst & Young LLP

AK

RI

VT

NY

NJ

DC

DE

WV

SC

OH

KY

IN

MI WI

VA

TN

AL MS

TX

OK

IA

MN

ND

SD

NE

NM AZ

CO

WY

MT

OR

ID

HI

WY

States with projected 2012 unobligated balances

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What’s trending in 2012?

► Legislative and administrative trends in 2012: ► Affiliate sales/use tax nexus ► Credits for hiring unemployed veterans ► Creating, extending, expanding credits for job creation, investment

and research and development (R&D) ► Increased focus on taxing nonresidents ► Increased discussions around tax reform

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Employment tax

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Form W-2 reporting of health benefits

► Effective in tax year 2012, employers are required to report the value of employer-sponsored health insurance on Form W-2. ► Box 12, code DD is used for this purpose.

► The requirement to report employer-sponsored group health plan coverage costs is informational only. ► Costs reported are not included in employees’ taxable income (for now).

► Until the issuance of further guidance, an employer is not subject to the reporting requirement for a calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year.

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Form W-2 reporting of health benefits

► An employer may apply any reasonable method of reporting the cost of coverage for an employee who terminated employment during the calendar year, so long as the method is used consistently for all employees covered under the plan.

► If an individual transfers to a new successor employer, generally both the predecessor and successor employers must report the employer-sponsored group health plan coverage that each provided, unless the successor reports using the alternate procedure (Revenue Procedure 2004-53).

► Only the cost of “applicable employer-sponsored coverage” is required to be reported. ► Coverage that is includable in income is still reportable as employer-

sponsored coverage, which would include, for example, coverage provided by an employer to an employee’s non-dependent partner and the partner’s children.

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Form W-2 reporting of health benefits

► These are not included in the reporting requirement: ► Any Archer medical savings account (MSA) or health savings account (HSA) ► Long-term care ► Accident or disability income coverage ► Supplemental liability insurance ► Automobile liability insurance ► Workers’ compensation ► Automobile medical coverage ► Credit insurance ► Coverage for only a specified disease or hospital indemnity ► Any coverage under a multi-employer plan ► Any coverage under a Health Reimbursement Arrangement (HRA) ► Any self-insured group health plan that is not subject to any federal continuation coverage

requirements (the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)) ► Employee’s pre-tax contributions to a flexible spending arrangement ► Employer “flex credits” in a flexible spending account (FSA) are reportable; the exclusion

applies only to employee pre-tax deferrals

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Form W-2 reporting of health benefits

► There are three methods for calculating the reportable cost: ► The COBRA-applicable premium method ► The premium-charged method ► A modified COBRA premium method

► An employer that subsidizes the cost of coverage or that determines the cost of coverage for a year by applying the cost of coverage in a prior year may calculate the reportable cost using this method.

► A special rule applies for employers that charge employees a composite rate (the same premium for different types of coverage under a plan)

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Changes to note for 2013

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Social Security tax to increase in 2013

► The employee withholding rate of 4.2% is set to return to 6.2% in 2013. ► The employer rate will remain at 6.2%.

► The Social Security Administration estimates that the wage base will increase from US$110,100 to US$113,700. ► The estimated annual maximum employee tax will increase by

US$2,425.20 (US$4,624.20 vs US$7,049.40) .

► The federal income tax rates are also set to automatically increase in 2013.

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Medicare tax to increase in 2013

► Effective in 2013, employers are required to withhold an additional Medicare tax of 0.9% on wages in excess of US$200,000 for all employees, regardless of marital status. ► There is no matching employer contribution, and employees are required to

pay the additional tax based on a threshold of income and their filing status. ► Taxpayers with combined income in excess of US$250,000 pay the

remaining Medicare tax on their federal Form 1040. ► The additional Medicare tax is not separately reported on Form W-2. ► Form 941 will include a separate line for additional Medicare tax.

► Also effective in 2013, investment income is subject to Medicare tax. ► A number of employees may need to revise their Form W-4 in 2013 to take

into account this additional tax.

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Limit on flexible spending accounts

► Effective in 2013, to be qualified under a cafeteria plan, an employee’s health flexible spending account contributions cannot exceed US$2,500 per year (with the annual amount indexed each year thereafter for inflation).

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Expiring provisions — time is running out

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Extender legislation hopefuls in 2012

Provision Description Expiration date Undergraduate and graduate-level education assistance

Exclusion of up to US$5,250 per year

December 31, 2012

Adoption assistance Effective in 2012, exclude up to US$12,170 per year indexed for inflation

December 31, 2012

Work Opportunity Tax Credit (WOTC)

Other than certain veterans groups

December 31, 2012

Mass transit benefits Renew or reinstate the parity between parking and transit benefits

December 31, 2012

Expense tax credit for employer child-care assistance

A credit of up to US$150,000 for acquiring, constructing, refurbishing or expanding a child-care facility

December 31, 2012

Bush-era tax rate reductions The tax rates are set to automatically increase in 2013 to 28%, 31%, 36% and 39.6% (currently 25%, 28%, 33% and 35%, respectively)

December 31, 2012

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Impact of 2013 income tax increases

► If the Bush-era federal income tax rates are allowed to lapse: ► The federal supplemental withholding rate would increase from

25% to 28%. ► The federal flat-tax rate for supplemental wages in excess of US$1

million would increase from 35% to 39.6%. ► Employer gross-up costs would significantly increase. ► Internal Revenue Service (IRS) liability assessments for failure to

withhold federal income tax would significantly increase.

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In the face of uncertainty . . .

► Be certain to make educational reimbursements in 2012 ► Payments that fall into 2013 could be fully taxable (because the

US$5,250 would no longer apply).

► Continue to certify WOTC-eligible employees with the state employment agency ► A retroactive reinstatement to January 1, 2012 is still likely and will

apply only to employees properly certified.

► Continue to monitor developments and expect last-minute Congressional action

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Property tax

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Property tax issues

► Three major issues impacting property taxes: ► Classification — assets are classified in the most advantageous

category, consistent with state law ► Real vs personal property ► Taxable vs exempt ► Abatements or special treatment

► Verification — assets are in place, in use and correctly accounted for

► Valuation — assets are valued appropriately (the basis in the majority of states is fair market value)

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Triggering events

► Potential events that could trigger a change in valuation of fixed assets: ► Mergers and acquisitions (M&A) ► Fixed-asset impairment analysis ► Economic downturns and adverse market conditions ► Facility expansions and new construction ► Loss of use of facility due to natural disaster or human error ► Consolidations and divestitures ► Sale, disposal and transfer of fixed assets

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What we are seeing

► Challenges ► Sustained, and in some cases increasing, levels of budget deficits

impacting state and local government responses to adjusting property values ► Speed of resolution on appeals has slowed down significantly as jurisdictions

trade the potential for multiple-year changes against a current cash loss

► Increased third-party auditor activity ► Effective tool in identifying unreported assets as a way to increase tax revenue

► Overall residential and commercial values have eroded the tax base, leaving manufacturing, distribution and utility property carrying a larger percentage of the property-tax burden ► The assessment community is pushing back with greater force and frequency

on appeals, value reductions and waivers on fees, penalties, etc.

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What we are seeing

► Opportunities ► Aggressively value assets using alternative techniques and

strategies ► Identify and quantify reduction in values for both taxable real

estate and business personal property: ► Physical depreciation ► Functional obsolescence – technology changes, design of facilities ► Economic obsolescence – external factors

► e.g.: FDA denial of new drug, patent expiration, governmental regulations

► Address fixed-asset issues such as unrecorded disposals, accretions, reclassifications, etc.

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What we are seeing

► Trends ► Embedded software and intangibles:

► Technology has greatly changed the design and functionality of assets over the last 10 years.

► The role and proportion of embedded software in many manufacturing-related assets has become more significant over time.

► Intangible assets such as software, R&D, consulting, construction soft costs and intellectual property are often embedded in the total costs of an asset.

► Cost-saving benefits from the software/intangible exemption has become attractive and some companies are actively and aggressively pursuing these exemptions.

► Applicable for most industries, but particularly in high tech manufacturing, telecommunications, defense/aerospace, IT, transportation and automotive industries.

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Embedded software and intangibles exemption opportunity

► Courts in California and Texas have held software embedded in an otherwise tangible asset to be non-taxable as an intangible.

► A majority of the 37 states that tax tangible personal property do not tax intangible assets that may include, but are not limited to, software.

► Intangible assets are often present on personal property renditions with misclassified assets or unrecorded disposals.

Summary of the issue

An analysis can be performed to segregate the exempt software bundled into hardware accounts, which leads to a reduced property tax basis consistent with statutory authority.

► Taxing authorities in jurisdictions that assess property tax generally will accept the filed rendition, provided it reconciles to the fixed asset list.

► A reduction in value can be achieved by utilizing various proven methods to quantify exempt software.

The identification and quantification of all intangible assets, along with corrected classifications and identification of unrecorded disposals, can be coordinated with a rendition filing that conforms to the fixed asset list, and will generally be accepted by the jurisdiction.

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Sales and use tax

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What we are seeing

► Challenges ► Difficulty determining taxability of prescription and non-prescription sales:

► Human or animal use? ► Reimbursed by Medicare/Medicaid? ► Defining wholesale vs retail transactions

► Difficulty determining taxability of medical and prosthetic devices: ► Exemption certificate documentation

► Challenge of issuing proper exempt-use certificate to vendor on purchases ► Challenge of securing proper exempt-use certificate from customer on sales

► Technology: ► Developing and employing appropriate use tax accrual process to address promotional

printing/sales reps items ► Use sales factor by state or some other formula (i.e., sales reps in state/total sales

reps)? ► Which general ledger accounts or vendor purchases to include in calculation? ► Is Direct Pay Permit an option? ► Audit challenges of convincing states that a chosen formula is appropriate?

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What we are seeing

► Trends ► States are more aggressively attacking use-tax calculations on

printed promotional items/samples: ► Tennessee is well known for attacking all industries (not just health

care-related) on promotional items/samples distributed within the state.

► Ever-changing taxability of software and software-related services. ► States (e.g., PA and CO) are flipping their decisions on enforcing

taxability of applications delivered electronically. ► What is electronically delivered? Certain states tax “electronically

delivered” software, but consider “hosted” applications to be a non-taxable service.

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What we are seeing

► Opportunities for pharmaceutical industry: ► State manufacturing exemptions can include:

► Machinery and equipment ► Utilities used in production process (can potentially include utilities

used via heating, ventilation and air conditioning (HVAC)) ► Parts, labor and other maintenance services on such

qualified equipment ► Generally includes packaging materials and supplies

► R&D exemption: ► Lab supplies and equipment ► Utilities used in lab

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Nexus — state administrative activity

► Alabama ► Rule 810-6-2-.90.01 (effective August 24, 2012) — guidance on when a seller

has substantial nexus with Alabama; includes affiliate relationships ► California

► CA Regs. 1684 (effective August 26, 2012) — expanded sales/use nexus provisions aimed at remote retailers takes effect September 15, 2012

► Colorado ► PLR-12-002 (May 30, 2012) — out-of-state internet retailer has nexus with

Colorado based on the activities of in-state affiliate ► Hawaii

► LR 2012-10 (July 10, 2012) — out-of-state internet retailer has nexus with Hawaii due to in-state affiliate’s return policy and loyalty points program

► Pennsylvania ► Sales and Use Tax Bulletin 2011-01 (December 1, 2011) — lists activities that

create nexus

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Nexus — proposed federal legislation

► Three pieces of federal legislation on nexus: ► The Main Street Fairness Act (S. 1452/H.R. 2701) ► The Marketplace Equity Act of 2011 (H.R. 3179) ► The Marketplace Fairness Act (S. 1832)

► Each bill would permit states to require remote sellers that lack physical presence within the state to collect sales or use tax on taxable transactions with in-state residents.

► The state would be required to adopt some form of sales and use tax law simplification — either through streamlined sales tax or some other alternative.

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Judicial updates

► Pennsylvania ► The Pennsylvania Supreme Court has held that MRI and PET/CT

Scan systems that were installed pursuant to construction contracts did not become permanent parts of realty, and were therefore subject to Pennsylvania sales tax. The decision reverses two 2009 rulings by the Commonwealth Court, which relied on a prior Pennsylvania real estate tax decision to conclude that the systems became realty once they had been “attached” to the taxpayer’s structure. Northeastern Pennsylvania Imaging Center v. Commonwealth of Pennsylvania, No. J-100A-2010 (Pa. Sup. Ct. December 21, 2011).

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Judicial updates

► Texas ► In a recent decision, the Texas Court of Appeals for the Third

District held that special surgical instruments used in orthopedic surgery were exempt from sales and use tax as orthopedic devices. Zimmer US, Inc. v. Combs, No. 03-11-00178-CV (February 9, 2012). Similarly situated taxpayers should consider filing protective refund claims while the case is on appeal to the Texas Supreme Court.

► The Texas Court of Appeals has held that a private health insurance carrier, Blue Cross and Blue Shield of Texas, Inc. (Blue Cross), was entitled to a refund of sales taxes on purchases related to the administration of federal programs, because the transactions qualified for the sale-for-resale exemption. Combs v. Health Care Services Corporation, No. 03-09-00617-CV (Tex. App. Ct. March 16, 2011).

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Credits and incentives: key 2011 survey findings and recommendations

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Key 2011 credits and incentives survey findings

Active in incentives arena ► 38% are active or very active in capturing incentives ► 37% are more active today than they were two years ago ► 88% of companies think they will be as active or more active in pursuit of incentives in the next

24 months ► 80% of companies are not aware of or have not claimed any benefits associated with

sustainability and energy efficiency in the past 24 months

Incentives influencing decisions ► 42% and 26% of companies say business expansion is influenced by the availability of

incentives domestically and internationally, respectively ► 39% of companies said that incentives influence their capital expenditure decisions ► 33% of the C-suite is starting to focus or is more focused on maximizing incentives than in the

past

Incentives compliance management ► 57% of companies are managing their incentives compliance with an Excel spreadsheet and

have no formal compliance management process ► 76% of companies have one or less full-time equivalent (FTE) focused on capturing incentives

and credits

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Life sciences industry incentives context

► Increased sales in emerging markets ► There is higher projected growth in emerging markets, while mature markets will

see relative stagnation in growth.

► Patent cliff ► Both the number of drug patents expiring and the amount of sales to be affected

are unprecedented in the industry.

► M&A activity and alliances ► Many large life sciences companies have continued the consolidation trend as they

acquire other companies in order to maintain their R&D pipelines.

► Costs and uncertainties of new product development ► Research and development expenditures and extensive and costly clinical trials

lead to high drug development costs and the potential for losses if products in the pipeline are not commercialized.

► Government regulations ► On average, pharmaceutical companies have invested eight years and

approximately US$1 billion in order to develop and commercialize new drugs.

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How active is your company in taking advantage of business incentives and tax credits?

Percent of 52 life science respondents Credits and Incentives Study (2011)

4%

37%

44%

10%

6%

0% 10% 20% 30% 40% 50%

Very active, it has a department or team focused on maximizing incentives at all levels, and has

a process in place to identify opportunities

Active

Moderately active

Not active at all, and not interested or don't think they

apply

Not active, and feel company is missing opportunities

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How many full-time equivalent (FTE) in-house resources do you have dedicated to business incentives and tax credits?

Percent of 52 life sciences respondents Credits and Incentives Study (2011)

81%

13%

4%

2%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Less than one FTE

One to three FTE

More than three to five FTE

More than five FTE

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In your opinion, what have been/will be the two primary barriers to securing business incentives and tax credits?

Percent of 52 life sciences respondents

42%

27%

23%

40%

10%

6%

13%

4%

0%

0%

10%

42%

31%

21%

48%

6%

15%

10%

4%

2%

0%

4%

0% 10% 20% 30% 40% 50% 60%

Operations too busy to execute on the requirements

Program requirements too burdensome

Lack of timely information on transactions

Company in loss position, and cannot take advantage of tax credits

Difficult to coordinate within the various company departments

Too much paperwork required

Tracking too difficult

Company does not want to share data publicly on investment plans, etc.

Company management does not want to participate for business reasons

Employee privacy

Other, please specify:

Next 24 Months Prior 24 Months

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How aware is the C-suite (management) of your company with respect to the business incentives and tax credit opportunities?

Percent of 52 life sciences respondents Credits and Incentives Study (2011)

13%

58%

21%

8%

0% 10% 20% 30% 40% 50% 60% 70%

Not aware at all

Somewhat aware

Starting to focus on them more than in the past

Very aware, and focused on maximizing

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How important are business incentives and tax credits as a cost-reducing tool for your organization?

Percent of 52 life sciences respondents Credits and Incentives Study (2011)

19%

29%

19%

31%

2%

0% 10% 20% 30% 40%

Extremely important

Important

Neutral

Not that important, but we claim them where we meet the

requirements

Don't know

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In your organization, which of the following business decisions are influenced by incentives and tax credits? Check all that apply.

Percent of 52 life sciences respondents Credits and Incentives Study (2011)

49%

44%

42%

35%

16%

14%

16%

23%

12%

0% 10% 20% 30% 40% 50% 60%

Business expansion within the United States

Making capital expenditures

Job creation

Business expansion outside the United States

Business relocation

Real estate/site selection

Job training

Mergers/acquisitions

Other, please specify:

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What two primary changes would you like to see in the way state and local governments negotiate or offer incentives?

Percent of 52 life sciences respondents Credits and Incentives Study (2011)

55%

29%

39%

18%

14%

20%

24%

4%

2%

0% 10% 20% 30% 40% 50% 60%

More streamlined application process, i.e., more automation

Less back-end administrative compliance

Increased ability to monetize tax incentives, i.e., assignability,

saleability

Greater predictability in programs

Greater transparency in approval process and criteria

Centralized point of contact

More timely resources

Electronic signature

Other, please specify:

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In your opinion, how would you categorize your company’s growth plans via capital expansion over the next 24 months?

Percent of 52 life sciences respondents Credits and Incentives Study (2011)

2%

20%

31%

33%

4%

10%

0% 10% 20% 30% 40%

Aggressive growth (more than 20%)

Strong growth (more than 10% to 20%)

Moderate growth (more than 5% to 10%)

Will remain flat (0 to 5%)

Will shrink

Don't know/Not sure/Refuse to Answer

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In the next 24 months, what percent of your capital spend and/or job creation will occur in the United States versus abroad?

Percent of 52 life sciences respondents Credits and Incentives Study (2011)

49%

14%

16%

6%

16%

0% 10% 20% 30% 40% 50% 60%

Greater than 75% within the United States

Greater than 50% to 75% within the United States

Greater than 25% to 50% within the United States

Greater than 5% to 25% within the United States

0% to 5% within the United States

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An integrated company-wide process allows the opportunity to realize additional benefits

Limitations of decentralization

► Inefficient data collection ► One-off pursuits ► Single department approach ► Isolated relationships with public

officials ► No leverage of company’s economic

impact ► Value leakage ► Loss of value between

negotiation/realization ► Limited information ► On-demand service ► Irrelevant incentives ► Limited knowledge transfer

Benefits of an integrated global process

► Streamlined/prioritized data collection ► Opportunity pooling (cross-department) ► Established, deep

relationships/continuous contact ► Maximized value ► Detailed information – true prioritization ► Continuous service ► Relevant packages – negotiated with

profile in mind ► Comprehensive/continuous knowledge

transfer

Common processes

Centralization

Global teaming

Knowledge transfer

The power of an integrated process

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Integrated incentives function: guiding principles

► Executive sponsorship ► Multiple company stakeholders involved ► Established formal communications protocol ► Clearly defined incentives triggers and thresholds ► Consistent incorporation into larger capital acquisition process ► Standardized data collection process and requests ► Identification/mitigation of “risks to benefits” in any jurisdiction ► Functional technology system for incentives identification, evaluation

and maintenance ► Constant monitoring, tracking and reporting of savings ► Coordinated compliance to reduce clawback risk

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Executive sponsor(s)

and project team

Finance/ treasury Tax

Facilities/ real estate

General counsel

Human resources

Government affairs

Operations

Sustainability

Integrated incentives function: integrated stakeholders ► The 8% of our survey respondents who consider incentives a strategic focus are far more likely to

maximize their incentives return on investment. They have defined a multidisciplinary, managed approach to evaluate and capture cost-savings associated with capital investment from budget authorization through compliance.

Business development

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Global life sciences incentives triggers

► Research and development ► Pharmaceutical companies continue to make significant investments in

research and development. Because these investments lead to new jobs and the potential for newly created enterprises, this activity is being encouraged by governments around the world through incentive programs.

► Technical hiring ► Because many of the jobs associated with new drug development are

often higher-paying, governments have been targeting them with “high-skilled” job creation incentives.

► Capital expenditure ► Large capital projects such as new manufacturing facilities or service

facilities that lead to significant hiring are frequently eligible for incentives. Governments are willing to compete to provide the most cost-effective location in which to place such investments.

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Global incentives trends

► Increased internal scrutiny on business case for investments, including incentives

► More outbound investments in low-cost or developing countries

► Consolidation and rationalization seen as more routine decisions

► Increased research and development demands

► Higher-quality job creation

► Impact of climate change and sustainability considerations

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Types Description

Negotiated grants Some countries make cash grants available on a negotiated basis for approved projects, for example.

Tax incentives Some countries offer tax incentives that provide large deductions or credits for R&D expenditures. These programs range from a 130% deduction in the UK to a 400% deduction in Singapore.

Patent boxes Patent box regimes allow companies to pay lower taxes and potentially receive other preferential treatment for locating intellectual property within the respective country.

R&D grants

The European Union funds 50% of qualifying costs on approved R&D projects. FP7 has budgeted €6.1 billion for health-related projects. IDA Ireland provides cash grants on a discretionary basis to investments involving R&D.

Hiring incentives

Hiring incentives are generally made available for significantly increasing location headcount as well as for creating jobs that require higher-skilled/higher-paid positions. Incentives may be in the form of wage subsidies or tax relief.

► Measures used by authorities around the globe to influence behaviors within their jurisdictions, including statutory and discretionary programs for both tax and non-tax benefits, include:

Global incentives solutions for life sciences companies

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Sample activity categories and incentive types

Research and development

Sourcing and supply

Production and manufacture Distribution Delivery

Common activities:

Note: refer to slide 58 for incentive types available in each category above

► R&D ► A health care company obtained discretionary cash grant, which funded 60% of R&D costs.

► Sourcing and supply ► A life sciences company considering locating a R&D center in UK or Ireland was able to

successfully negotiate a cash grant in Ireland to subsidize R&D costs.

► Production and manufacture ► A manufacturing company considering opening a new manufacturing facility in Malaysia found

that making minor adjustments to business purposes, such as including R&D operations in the manufacturing facility, would qualify investment for considerable cash subsidies.

► Distribution ► A large company was able to obtain a 10-year income tax exemption when relocating its

distribution center in China.

► Delivery ► A manufacturing operation was able to obtain funding for modal shifts in Europe.

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Sample global incentives

Region Country R&D Location Climate change and

sustainability

Americas

Argentina v √ Brazil √ √

Canada √ Colombia √

Mexico √ US √ √ √

Asia-Pacific

Australia √ √ China √ √

Indonesia √ Korea √

Malaysia √ Singapore √ √ Vietnam √

EMEIA

Belgium √ Czech Republic √

France √ Germany √ Hungary √

India √ Ireland √ Poland √ Russia √

South Africa √ Spain √

UK √ √