Draft R&D Tax Incentive Determination on clinical trials (Phase 0-III) for an unapproved therapeutic good.

17 February 2022

PRIVATE AND CONFIDENTIAL
AusIndustry
Department of Industry, Science, Energy and Resources,
GPO Box 2013
CANBERRA ACT 2601 rdti.engagement@industry.gov.au

Dear Sir/Madam

William Buck (Vic)’s response to Industry Innovation and Science Australia Board’s 2021
Industry Research and Development Draft Determination

William Buck is a leading firm of Chartered Accountants and advisors with a proud reputation for delivering
value and personalised results to our clients for over a century. The William Buck Group consists of over
100 directors and 700 professionals across Australia and New Zealand. We have offices represented in
Sydney, Melbourne, Brisbane, Perth, Adelaide and Auckland. Our Victorian office boasts a dedicated R&D
Tax Incentive team who provides holistic advice to our clients in collaboration with our taxation team across
many industries with a strong focus on Life Sciences.

Introduction
William Buck (Vic) has considered Draft Industry Research and Development (R&D Tax
Incentive on clinical trials, Phase 0, I, II, III for an unapproved therapeutic good)
Determination 2021 (‘the Draft Determination’) released on 20 January 2022 in detail and
appreciates the Australian Government’s support of the Australian Biotechnology sector as
well as its endeavour to generate greater certainty in relation to activity eligibility under the
R&D Tax incentive.

It is William Buck (Vic)’s opinion, after reviewing the Draft Determination, that it does seek to
provide greater certainty around the eligibility of clinical trials within Australia. William Buck
does however recommend some minor changes discussed below.

In order to draw more international life sciences companies to Australian clinical research
organisations (CROs) and our state-of-the-art clinical trial centres, William Buck (Vic) has
focused this response on a request that the Australian Taxation Office (ATO) (in
collaboration with AusIndustry where required) provides clear supplementary information or
guidance for organisations seeking to undertake clinical trials within Australia (inbound
companies) with more transparency to address common issues we see relating to a
company’s business, tax compliance and transfer pricing requirements if looking to register
its activities in Australia through the R&D Tax Incentive.
Basic guidance on the R&D Tax Incentive’s compliance requirements, such as correct company
structure and record keeping, is provided across various online resources such as Business.gov,
asic.gov.au and ato.gov.au. However, it is William Buck (Vic)’s opinion that these resources are spread
too broadly and are challenging to collate without a combination of specialist legal, R&D and/or tax
advisors experienced with setting up companies in Australia to undertake inbound R&D activities within
Australia.

Specifically, while a prospective inbound R&D claimant is generally guided to consider the impact of
Australia’s transfer pricing rules, there is no specific guidance for them on the potential financial
impacts of Australia’s transfer pricing rules under the:
1. Australian owned R&D tax incentive claim pathway; or
2. Foreign owned R&D tax incentive pathway.

In our opinion, the Australian government’s marketing of the R&D tax incentive indicates to small and
medium sized (aggregated turnover less than $20 million) inbound companies that they may be able to
claim 43.5% of their Australian clinical trial costs under the R&D tax incentive, when this is not actually
the case once transfer pricing is overlaid. We see inbound companies regularly, and mistakenly, factor
the 43.5% level of R&D tax incentive into their business case for conducting clinical trials in Australia.
This makes the financial business case seem attractive for conducting a clinical trial in Australia,
however the reality is that an Australian clinical trial may actually cost more than conducting the trial in
another country. When the actual costs are known, inbound companies can be discouraged from using
Australian CRO’s for their clinical trials, particularly if seeking to claim R&D tax incentive benefits under
the foreign owned R&D tax incentive pathway in sections 355-215 and 355-220 of the Income Tax
Assessment Act (ITAA) 1997.

Further, Australia’s complex and subjective transfer pricing rules apply to all potential R&D claimants,
including small and medium size companies, and not just large pharmaceutical businesses. The
taxation related compliance costs for fully complying with both Australia’s R&D tax incentive laws and
transfer pricing laws over a project life can be upwards of AUD $100,000 for a two-year clinical trial,
which makes these costs significantly disproportionate for a smaller biotech company conducting an
AUD$2 million clinical trial in Australia, versus a large pharmaceutical company conducting an AUD$50
million or greater value clinical trial. Not fully complying with transfer pricing rules is not an option for
inbound claimants for fear of an ATO audit and subsequent recoupment of R&D tax incentive funding
years after an R&D claim is made.

Therefore, we request further clarity on:
— The overlay of transfer pricing financial effects over the expected R&D Tax Incentive benefits with
regard to both foreign owned or Australian owned R&D structures, particularly for small and
medium sized international life sciences companies seeking to conduct clinical trials in Australia.
— Whether an Advance Overseas Finding is required to claim a drug product manufactured overseas
but consumed in Australian clinical trials in an R&D claim.
— Records that international life sciences companies should keep to satisfy both AusIndustry and the
ATO and that the company has satisfied their transfer pricing record keeping, and their obligations
under Australian corporations and taxation laws. In this regard, we would welcome the ATO
releasing transfer pricing record keeping safe-harbours for small and medium sized biotech
businesses conducting Australian clinical trials.

Accordingly, as part of this document, we intend to provide recommendations for specific topics the
Draft Determination could provide further guidance on to generate greater certainty for businesses
seeking to undertake clinical trials within Australia and register them through the R&D Tax Incentive.
Recommended changes to the existing Draft Determination

William Buck (Vic) recommends the following improvements to the Draft Determination:
— Broadening the definition of Phase II trials to include trials of the unapproved therapeutic good in
‘healthy volunteers and patients suffering from the condition for which the good is intended…’, and
not limit them to “patients suffering from the condition…”, so that the definition is inclusive of clinical
trials which require healthy volunteers as study controls or clinical trials for prophylactic treatments.
— Providing further clarity on whether clinical trials involving generic products for new indications will
be eligible.

Supplementary information and guidance for claimants to attract
additional clinical trials to Australia
1. Transfer pricing
We recommend the government provides greater clarity and transparency on an inbound R&D
company’s obligations with respect to its transfer pricing (TP) requirements and the financial effect
transfer pricing considerations have on the overall benefit the company is expected to receive as a
result of claiming either foreign owned or Australian owned R&D. From our experience many
international life sciences companies looking to undertake clinical trials in Australia, including their tax
agents and R&D advisors, are unaware of specific TP considerations that may apply.

Further clarity would be welcomed on the financial effect of TP including:
— Examples or case studies illustrating the financial effects of TP on the expected R&D Tax
Incentive benefits for small and medium sized international life sciences companies seeking to
conduct clinical trials in Australia, with regard to both (a) foreign owned and (b) Australian
owned R&D structures;
— Whether specific TP advice is required to claim any overseas activities undertaken by an
overseas related party for Australian owned R&D claimants that seek an Advance Overseas
Finding.
— The specific documentation required to comply with transfer pricing laws (see Record-
Keeping). In this regard, we would welcome the ATO releasing transfer pricing record keeping
safe-harbours for small and medium sized biotech businesses conducting Australian clinical
trials. The safe-harbours would ideally include commercially relevant:
a. ‘low risk’ transfer pricing mark-ups on R&D project related costs between the Australian
entity and its foreign parent or related entity; and
b. ‘low risk’ commercial return expectations for the commercial exploitation of the new
scientific information and other intellectual property created from an Australian clinical
trial.

Without interaction with specialist advisors, a foreign company setting up R&D operations in Australia
would not have oversight on such issues.
2. Importing drug products

William Buck (Vic)’s notes that it is not aware of any legislation or case law that provides clarity on
claiming the purchase and import of drug products from overseas manufacturers which are consumed
in Australian clinical trials as notional deductions under the R&D Tax Incentive for Australian.

As many businesses seeking to undertake clinical trials within Australia may purchase drug products
(either the test article or a best in market control) from overseas manufacturers, William Buck (Vic)
recommends further guidance on whether an Overseas Finding is required to include these expenses
as notional deductions under Sections 355.205 (or potentially 355.480) of the Income Tax Assessment
Act (ITAA) 1997.

3. Commercial and record-keeping requirements

We recommend ATO (in collaboration with AusIndustry as necessary), draft a step-by-step guide which
provides clarity on the process to set up an Australian presence and the required agreements and
adequate record keeping for both foreign owned and Australian owned R&D claimants to assist
inbound companies comply with Australian corporate and taxation laws. Without considerable support
from advisors, international businesses (and this may also apply to Australian start-ups and university
spin-offs companies) may be unaware of their commercial requirements before undertaking clinical
trials and may find their activities ineligible through poor choices made during the initial set-up period.

As part of this step-by-step guide, we believe businesses would benefit from guidance on the following:

— Company structure and set up. Guidance on company structure options and documentation
required, funding of the Australian entity, the Australian tax reporting period and whether a
company should apply for year-end change to align with its overseas parents, registering for an
ABN and setting up the required agreements and contracts.

— Agreements and contracts. Further specific guidance on commercial agreements required are
welcomed to enable an international life sciences company undertaking clinical trials in Australia to
support their foreign owned or Australian owned position and to provide clarity on whether (and
how) the ‘for test’ may be satisfied for each pathway. Guidance on agreements a company is
required keep with third parties or with related parties including input on the requirements for
service agreements, intellectual property ownership and license agreements, loan agreements (and
how these can satisfy payments to associates), and/or agreements between the foreign entity and
Australian entity.

— Other record-keeping. Further enhanced guidance on the specific records international businesses
looking to undertake R&D in Australia should keep substantiating their structure, R&D expenditure,
R&D activities (including clinical trials) and transfer pricing obligations are recommended to assist
companies meet the legislative requirements in the event of ATO compliance activity.

One of note, is the requirement for Australian owned R&D companies to prepare and keep
documents explaining their commercial rationale to satisfy TP laws, and to justify its Australian
owned position and its intention to eventually commercialise the results of R&D activity though the
Australian company undertaking the R&D activities.
William Buck (Vic) suggests greater certainty could be provided through a list of document samples
and/or list of existing advice and guidance which could assist international companies better meet their
record keeping requirements.

Conclusion
It is William Buck (Vic)’s opinion that this Draft Determination will provide greater certainty around the
eligibility of clinical trials within Australia with our recommended amendments and is a solid step towards
providing more clarity to the self-assessment program. However, we recommend that to promote Australia
as a premier destination for clinical trials, inbound companies may also benefit from further clarity and
guidance on the obligations required by the ATO.

Specifically, we would welcome the ATO issuing supplementary information or specific guidance on the
compliance requirements for small and medium sized international life sciences businesses seeking to
undertake clinical trials in Australia and to register them through the R&D Tax Incentive and whether those
requirements might change due to this draft determination.

Should you have any queries in relation to the above please contact our office on 9824 8555.

Yours faithfully
William Buck (VIC) Pty Ltd
ABN 18 361 680 776

Dr. Rita Choueiri
Director