Duties, Taxes, and Tariffs in the Life Sciences Industry: Explained

The life sciences industry, including pharmaceutical companies, medical device manufacturers, and biotechnology firms, is highly globalized. As such, businesses often face the challenge of navigating complex international regulations, especially when it comes to duties, taxes, and tariffs on imports and exports. Understanding these financial and legal obligations is crucial for maintaining compliance and ensuring smooth operations.

In this article, we’ll break down the key components of duties, taxes, and tariffs and how they impact businesses in the life sciences sector.

What Are Duties, Taxes, and Tariffs?

Duties

A duty is a tax levied by a government on goods that are imported or exported across international borders. In the life sciences industry, this can apply to pharmaceuticals, medical devices, laboratory equipment, and raw materials used in drug and medical device production. The duty rates vary depending on the classification of the product and the country of origin.

🔎 Example: If a pharmaceutical company is importing raw ingredients from India to the U.S., the government may impose a duty on these ingredients. The rate will depend on the Harmonized System (HS) code assigned to the product.

Taxes

While duties are a type of tax, other taxes may be imposed during the life sciences supply chain. For example, Value Added Tax (VAT) or Goods and Services Tax (GST) may apply to the sale or purchase of goods, depending on the country. These taxes are generally paid by the buyer, but the seller must collect them

🔎 Example: A European biotechnology firm might need to pay VAT on the sale of a medical device to a U.S.-based hospital, depending on the tax rules in both regions.

Tariffs

Tariffs are a type of duty imposed by governments on imported goods to protect local industries, regulate trade, or raise revenue. In recent years, tariffs have become a prominent topic in international trade discussions, especially in the pharmaceutical and medical device sectors.

🔎 Example: In a trade dispute, the U.S. may impose a tariff on imported medical devices from China, which could increase the cost of medical products in the U.S. market.

How Do Duties, Taxes, and Tariffs Affect the Life Sciences Supply Chain?

Understanding the impact of duties, taxes, and tariffs is essential for businesses operating in the life sciences sector, as these costs can significantly affect product pricing, profitability, and the overall supply chain.

Increased Costs

Import duties and tariffs add extra costs to the manufacturing and distribution process. These additional expenses may be passed on to consumers or patients, particularly in the case of high-cost items like specialized medical equipment or new medications.

🔎 Example: A medical device manufacturer might face a significant tariff increase on a product imported from an overseas supplier, which could lead to higher prices for hospitals and, eventually, patients.

Complex Compliance Requirements

The life sciences industry must comply with both local and international regulations regarding duties and taxes. This often means adhering to specific documentation requirements, classification codes (HS codes), and valuation procedures. Failure to comply can result in penalties, delays, and even shipments being held in customs.

🔎 Example: A pharmaceutical company that exports drugs to the EU may need to provide detailed documentation proving that the ingredients meet European Union standards. Failing to meet these requirements could result in customs delays, holding up critical supplies.

Impact on Trade Agreements

Tariffs and taxes are often subject to change as governments enter into trade negotiations or implement new trade agreements. These shifts can have both positive and negative effects on life sciences companies, depending on the agreement.

🔎 Example: The signing of a new trade agreement between two countries might reduce or eliminate tariffs on medical devices, allowing companies to reduce costs and increase market competitiveness.

Supply Chain Disruptions

Unexpected changes in tariffs or duties can disrupt the pharmaceutical supply chain, particularly when dealing with cross-border shipments. These disruptions can lead to delays, shortages, and even product recalls if products don’t meet local regulatory standards.

🔎 Example: If a tariff is suddenly imposed on imported chemicals needed for vaccine production, a pharmaceutical company might face delays in manufacturing or distribution, impacting vaccine availability.

How to Navigate Duties, Taxes, and Tariffs in the Life Sciences Sector

While dealing with duties, taxes, and tariffs can be daunting, there are ways to mitigate risks and maintain compliance:

1. Stay Updated on Trade Policies: The life sciences industry should remain proactive about international trade policies and their potential impacts. Regulatory changes can happen frequently, so staying informed helps companies adjust quickly to avoid surprises.
   ✨Tip: Partner with a customs broker or trade compliance expert to ensure that your business stays up-to-date with changing regulations.
   
   
2. Leverage Free Trade Agreements (FTAs): Many countries have entered into Free Trade Agreements that offer preferential duty rates for qualifying products. By ensuring compliance with these agreements, life sciences companies can reduce the impact of tariffs and taxes.
   ✨Tip: Ensure your company is fully aware of any FTAs between the countries you operate in and check if your products qualify for reduced tariff rates. You should also consider special classifications and provisions, such as prototypes or temporary imports.
   
   
3. Proper Product Classification: Correctly classifying products under the Harmonized System (HS) code is essential. This will ensure the right duties and tariffs are applied, avoiding unnecessary overpayment or penalties.
   ✨Tip: Work closely with your customs broker to verify the correct classification for your products. If you are looking for a customs broker to partner with, consider Biocair Customs Brokerage.
   
   
4. Consider Tariff Engineering: Tariff engineering is a strategy where companies may redesign products or change their manufacturing processes to reduce the duty rate or tariff impact. This can be especially useful in the life sciences sector where product components or manufacturing processes vary significantly. It’s important to be aware of rules around substantial transformation and whether this will impact the product.
   ✨Tip: Consult with legal and financial experts to explore whether tariff engineering could be an option for your business.
   
   
5. Build a Flexible Supply Chain: A flexible and diversified supply chain can help mitigate risks associated with unexpected tariffs or duties. By sourcing materials or products from multiple regions, companies can reduce reliance on any single country or supplier.
   ✨Tip: Build relationships with suppliers and logistics providers who have experience navigating complex customs procedures.
   

What not to do

Minimizing your exposure to duties, taxes, and tariffs can help to maintain profitability, however there are several practices that are not always reliable, and in some cases illegal. It’s important to avoid these to prevent any legal repercussions.

1. Transiting through other countries: While it could seem tempting to transit through other companies to remove the appearance of being made elsewhere, this is illegal and can lead to fines and other penalties. It is important that you don’t misrepresent the country of origin and ensure all documentation is accurate and up to date.
   🔎 Example: If a company imports goods from China moves them through other countries and does not disclose the origin, this would be considered misrepresentation.
   
   
2. Misclassification: Misrepresenting the classification of goods into a lower or exempt tariff category has significant legal and financial risks. This should be avoided. 
   🔎 Example: Using a tariff code that does not specifically provide for the product in accordance with the rules of interpretation would be considered misclassification. This remains true even if using a code that seems applicable but may not be “the best fit”.
   
   
3. Undervaluation: reducing the value of goods on a customs declaration would reduce the amount of duties owed, however this is treated as serious tax fraud and is liable for civil and criminal prosecution.
   🔎 Example: Deliberately undervaluing a shipment or avoiding a proper valuation methodology based on a classification of “no commercial value” is considered tax evasion.

✨Tip: Work with an experienced logistics provider to ensure the most efficient shipping routes are selected and all paperwork is accurately completed.

Conclusion

In the life sciences industry, navigating the landscape of duties, taxes, and tariffs is crucial to maintaining efficient global operations. These costs can significantly impact pricing, supply chain stability, and compliance, so understanding the details is key. By staying informed, leveraging trade agreements, ensuring proper classification, and building a flexible supply chain, companies can better manage the financial complexities of international trade and maintain smooth operations.