Financial executives in the medical device industry say the new excise tax included in the health care reform law will have a major impact on reducing their bottom line, according to a new survey by KPMG.
The survey found that 40 percent of the medical device industry financial executives polled said their companies are considering price increases and cost reductions such as decreasing headcount and changing their manufacturing processes in response.
Under the health care reform law, manufacturers and importers of medical devices would be subject to a 2.3 percent excise tax. The Internal Revenue Service and the Treasury Department issued proposed regulations for the tax in February.
The KPMG survey found that 61 percent of the 190 financial executives polled said the excise tax would negatively affect their company’s bottom line, while 60 percent predicted it would increase their company’s tax compliance costs. Fifty-five percent of the survey respondents also anticipate that it will be difficult for their company to comply with the excise tax. Sixteen percent of the respondents cited confusion over which products will be taxable and another 16 percent cited challenges in implementing systems for compliance as key issues.
Other expected compliance hurdles cited by respondents were determining the tax base for each taxable device (15 percent) and developing an implementation plan and determining the necessary resources required (13 percent).
“Manufacturers and importers of medical devices have a great deal of work to do in order to prepare to begin reporting the tax, which is effective for sales on and after the Jan. 1, 2013 effective date and applies to their sales of taxable medical devices in the United States,” said Frank Mattei, national tax leader of KPMG’s Pharmaceutical and Medical Device practice. “Companies will need to become familiar with the excise tax rules, identify their affected entities and products, and develop the appropriate compliance processes. A ‘gap’ analysis should be conducted as soon as possible to identify areas that need to be addressed.”
The KPMG survey also revealed that, in response to the tax, many medical device industry companies are already considering actions that they believe would help them stay competitive.
Twenty-two percent of the survey respondents said their companies would most likely consider increasing the cost of goods sold to the purchaser, while 13 percent said their organizations would most likely consider making cost reductions in areas such as headcount and manufacturing processes. Fifty percent said they were unsure about the actions their company might take.
Thirty-five percent of the respondents to the survey said their company is currently working across several departments to prepare for the implementation of the excise tax regime. Nine percent indicated that steps were being taken to prepare for the implementation within the tax department only, while 30 percent said they were not taking any steps to prepare because they were either still trying to understand the implications or evaluate their options.
Adam Uttley, a KPMG tax partner focused on accounting methods, credits, and special projects, advised that companies should work across various functions to prepare for effective compliance, because this is not just a tax issue. “Finance and tax departments will need to work with their IT, operations, and regulatory counterparts, while keeping leadership informed of issues that could affect the business,” he said. “Although many may still be hoping for legislative relief, it would be prudent to assume that a first deposit of medical device excise tax will be due by Jan. 29, 2013, and the first quarterly federal excise tax return will be due by April 30, 2013.”
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