Forty percent of respondents said their companies are already contemplating actions, such as price increases and cost reductions ‒ head count, manufacturing processes, or other means ‒ to stay competitive.
As part of the Health Care and Education Reconciliation Act of 2010, health care providers who manufacture or import medical devices or equipment for sale in the United States may be subject to a 2.3 percent excise tax. The IRS and the US Department of the Treasury issued proposed regulations pertaining to the tax in February.
Results of the KPMG survey show that:
- 61 percent of the 190 financial executives from the medical device manufacturing industry said the excise tax will negatively affect their company's bottom line
- 60 percent believe it will increase their company's tax compliance costs.
- 55 percent of respondents also expect that it will be difficult for their company to comply with the excise tax.
- 16 percent cite confusion over which products will be taxable and the challenges in implementing systems for compliance as key issues.
- 15 percent indicate that determining the tax base for each taxable device will be a compliance hurdle.
- 13 percent noted that developing an implementation plan and determining the necessary resources required were also expected compliance hurdles.
"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 January 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 reveals that, in response to the tax, many medical device industry companies are already considering actions that they believe will help them stay competitive.
- 22 percent of respondents said their companies would most likely consider increasing the cost of goods sold to the purchaser.
- 13 percent said their organizations would most likely consider making cost reductions in areas such as head count and manufacturing processes.
- 50 percent said they were unsure about the actions their company might take.
- 35 percent of respondents to the KPMG survey said their company is currently working across several departments to prepare for the implementation of the excise tax regime.
- 9 percent said steps were being taken to prepare for the implementation within the tax department only.
- 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.
"Companies need to work across various functions to prepare for effective compliance, because this is not just a tax issue," said Adam Uttley, a KPMG tax partner focused on accounting methods, credits, and special projects. "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.
"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 January 29, 2013, and the first quarterly federal excise tax return will be due by April 30, 2013," Uttley added.
The KPMG survey was conducted in March during a KPMG Tax practice-sponsored event focused on the impact of the medical device excise tax.