Proposed Tax Change Would Impact Clinical Research

By Ed Miseta, Chief Editor, Clinical Leader

The tax system in this country can be hard to understand at times. Last year my wife and I paid 28 percent in personal income tax. I realize there are many people who pay less, and higher income workers who pay more. Yet we also hear stories about large corporations and hedge fund managers who seem to pay next to nothing. The whole system is confusing.

Consider this: Pharma companies that conduct clinical research in-house essentially get a 100 percent tax break on the expenses incurred from that research (about 70 percent of which are typically wages). If that same company instead outsources that research to a CRO, it may claim only 65 percent of eligible expenses. The CRO gets no tax break. So, that 35 percent difference simply disappears. If a group of congressmen get their way, that situation might soon change.

The situation is actually a bit more complicated than that, but John Lewis, SVP of policy and affairs for the Association of Clinical Research Organizations (ACRO), notes the policy has an impact on the outsourcing dynamic.

“In many other countries, including Canada, France, U.K., Australia, and Austria, CROs may claim a portion of the tax credit as the entity employing the individuals conducting the research,” he says. “In some cases, that can actually be 100 percent of the total tax credit. In the U.S., our model rewards the intellectual property holder (the sponsor) which is not necessarily the entity employing the researchers or conducting the research.”

According to Lewis, this leaves CROs with a perverse incentive to conduct clinical trials outside the U.S. This is certainly not the only factor CROs consider when deciding where to conduct research. Other considerations include disease prevalence, patient population, the regulatory environment, and availability of investigators, to name a few. But tax policy is definitely a consideration, and may be encouraging some companies to take their research overseas.

“Here is one example,” states Lewis. “I have seen a few situations where a CRO will purchase a facility, such as a lab, from a pharma company. When the pharma company owned the lab, the research conducted there qualified for the R&D tax credit. But the next day, with the CRO owning the facility and conducting the same research on behalf of several sponsors, the tax credit disappears and the CRO gets none of it. This happens, despite the fact that the CRO is conducting the same work in the same facility with the same employees.”

The bipartisan bill (H.R. 1234), also referred to as the Domestic Research Enhancement Act of 2017, would amend the Internal Revenue Code of 1986 by making CROs eligible for a 35 percent tax credit on research expenses incurred while working under contract. H.R. 1234 was introduced by Rep. Patrick Meehan (R-PA) and cosponsored by two North Carolina congressmen (Republican Rep. George Holding and Democratic Rep. G. K. Butterfield).

It’s no secret that North Carolina is home to many CROs, including QuintilesIMS, PRA, PPD, INC Research, and LabCorp, parent company of Covance. Pennsylvania reportedly has over 6,000 jobs tied to clinical research organizations. In a statement, Rep. Meehan said, “The Domestic Research Enhancement Act will help make American life sciences firms more competitive on the global stage, spur more investment and innovation into groundbreaking new cures, and strengthen our regional economy.”

“The legislation essentially does two things,” adds Lewis. “It makes CROs eligible to receive the tax credit and allows them to claim the 35 percent of eligible expenses that is currently abandoned when the work is contracted out. It does not allow for any double counting. It does not change any definitions of qualifying research and does not take away any credits from the entities currently claiming them.”

Approximately 45 percent of clinical trials currently take place in the U.S. Lewis believes this legislation would ensure the U.S. remains the preeminent location of clinical trials and that clinical innovation remains within U.S. borders. 

“With passage of this bill, the U.S. would become an even more attractive location to conduct clinical trials, from the perspective of CROs,” says Lewis. “Also, CROs would have an additional incentive to hire research staff in the U.S. With most clinical trials being global in nature, the actual physical location of many staff positions, from project managers to data managers and statisticians is almost irrelevant. So any advantage in hiring staff in the U.S. would factor into the decisions by a CRO regarding where to add additional employees.”

While Lewis sees no direct impact of the legislation on sponsor companies, he does believe the legislation would marginally improve the financial position of the CRO industry. This would have the effect of ensuring the continued health and stability of an important and needed partner of sponsor companies.