Filing for patents in Switzerland could save Teva billions of shekels in tax.
Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) is stopping filing for patents in Israel for products developed in the country and will file for them in Switzerland instead. The step will enable the pharmaceutical giant to benefit from tax exemptions and incentives that are granted in Switzerland but are not available in Israel for development, manufacturing and registering patents, sources inform "Globes."
As "Globes" revealed earlier this year, Teva has paid virtually zero tax in Israel due to the Law for the Encouragement of Capital Investment which benefits companies manufacturing in Israel. However, for registering patents without subsequent manufacturing, Israel offers no tax benefits. Furthermore, production activities that are not completely undertaken in Israel and are part of the chain that include activities by companies abroad, are also not eligible for tax breaks.
In contrast Switzerland grants tax breaks for companies that are only filing for patents and not manufacturing in the country and conducts a tax breaks regime whereby products only partly manufactured in the country enjoy far reaching tax incentives if certain conditions are met.
"Globes" has also been informed that top executives at Teva contacted senior government officials to investigate the possibility of establishing a similar tax break mechanism in Israel for solely registering patents as exists in Switzerland. The possibility is being examined but it is thought unlikely that the tax incentive will be granted.
The main reason for reluctance to introduce such a tax break is that to create a benefit for solely registering patents without the need for manufacturing could result in factories being transferred out of Israel. Finance Ministry sources also explain that it is unacceptable to create tax policies based on the needs of a single company. Teva, as reported, plans taking advantage of the Swiss tax regime for registering patents and its company's activities abroad, and consequently Israel will lose revenue from patent registration. Huge profits
Luzzatto & Luzzatto Patent Attorneys managing partner Dr. Esther Luzzatto said, "Developing a drug costs on average close to a billion dollars. But the profits are also huge. We're talking about big money. Every successful drug rakes in billions of dollars a year while the patent is still valid."
Teva has a number of patents including that of its flagship drug Copaxone for treating multiple sclerosis. Teva is also very active in the generics sector developing treatments based on drugs where the patent has expired. Here too in developing generic drugs Teva has registered its own patents on the things it developed itself from the patent taken from another company.
Luzzatto said, "In this way Teva obtains an advantage for its treatments over others in the market. Every advantage gained by a product is significant and rakes in big money for the drug. This is a war over a lot of money."
And all these billions of dollars are subject to tax. A saving of several percentage points can bring hundreds of millions of dollars into a company's coffers. Teva's "departure" from Israel is affected by the volume of tax breaks that the company receives under the Law for the Encouragement of Capital Investment as a "preferred enterprise." The Israeli law competes with rival nations worldwide. Israel's tax levels are similar to other countries so that tax levels are about 6% in Switzerland, 10% in the UK, and 6% in Israel although the Economic Arrangements bill proposes hiking it to 10%.
Teva's problem is not the percentage of tax it pays but rather the company's ability to maximize the tax breaks it receives. A source that understands tax considerations said, "The problem is not where tax is higher but what is defined as revenue that enjoys tax breaks. The definition in Israel is very narrow. We are talking about a law regarding production in Israel based on industrial activities in the country. When we look at global companies like Teva with activities partly carried out in Israel but that buy raw ingredients abroad, and some of their activities are carried out by third parties, in such a situation the company does not enjoy tax breaks."
In other words according to the current interpretation by income tax, the question of what is production in Israel for Teva, which is a multinational with a chain of production encompassing countries overseas, means it won't enjoy tax benefits for patents and developments in this international chain.
In contrast Switzerland encourages companies to register their intellectual property and patents and manage their supply chain in Switzerland where production can be partly conducted. Tax break are offered providing management is carried out from Switzerland by at least 25 employees.
A well-known accountant told "Globes," "According to Switzerland's tax policies, the company will enjoy tax benefits on profits and this will attract all its profits to Switzerland where it will pay minimal tax of between 0% and 10%, usually 6%. This is very much suits global companies because they have companies and production personnel in many countries and they all provide production services to the same company so that managing the supply chain in Switzerland brings all profits to Switzerland and everybody gains. The Swiss gain a lot of jobs and tax revenue, and the companies can operate out of a main European country with very low tax rates."
Teva said in response, "We wish to emphasize that Teva's intellectual property registered or developed in Israel will remain here. Teva's IP, as gained from developments and acquisitions that were performed worldwide, is registered in different countries. This policy remains unchanged. Teva will be more than happy to transfer to Israel its IP assets developed and registered in other countries, should the Israeli tax regulations allow more competitive tax rates compared with other countries."
Published by Globes [online], Israel business news - www.globes-online.com - on June 18, 2013
© Copyright of Globes Publisher Itonut (1983) Ltd. 2013
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