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The WHO EWG’s proposals for taxes to fund medical R&D

Some surprising taxes, and evidence of IFPMA lobbying

Next week the World Health Organization (WHO) will consider the Executive Summary of the Report of the Expert Working Group on Research and Development Financing. This document, formally identified as EB 126/6 Add.1, includes consensus recommendations from 24 experts, including the U.S. member, Mark Rohrbaugh from the NIH. Among the core responsibilities of this panel was to recommend new sustainable ways to generate funds for medical R&D. In its executive summary, the group highlights “a new indirect tax (a consumer-based tax)” to generate billions of dollars per year.

  • a 10% tax on the arms trade market, which might net about US$ 5 billion per annum;
  • digital tax or “bit” tax: Internet traffic is huge and likely to increase rapidly; this tax could yield tens of billions of US dollars from a broad base of users;
  • A tax on bank account transactions, modeled aftere a 0.38% levy on paying bills online and major withdrawals, modeled after Brazil’s now rejected financial transaction tax – Contribuição Provisória sobre Movimentação ou Transmissão de Valores e de Créditos e Direitos de Natureza Financeira (CPMF).
  • A tax on airline tickets, modeled after the UNITAID airline tax now used by several countries to fund treatments for AIDS.

In one background document that was obtained by the IFPMA and circulated to its members, the digital tax on Internet users was predicted to raise $2 billion per year, and was given the most favorable rating in terms of being “most likely to work for health R&D.” (Mary Moran, Comparative Analysis of Innovative Financing Proposals for Health R&D, page 18).

We asked key members of the U.S. delegation to the WHO discussions if the US indeed endorsed these recommendations, since they were presented to the WHO EB as having the approval of all members of the EWG, including the representative from the NIH. They seemed frankly surprised at the question.

While the whole WHO EWG report is not yet public (except for a draft version on Wikileaks that was distributed by the IFPMA), the WHO has made several of the working papers of the EWG available, including a report by the George Institute for International Health. According to the George Institute paper, which was prepared for the EWG, the taxes are described as follows:

FINANCING PROPOSALS
The following fundraising options have been put forward based on the likelihood they can generate new funds for health R&D in a sustainable way:

  • A new indirect tax (a consumer based tax)
  • Voluntary business and consumer contributions
  • Taxation of repatriated pharmaceutical profits
  • New donor funds for health R&D

A new indirect tax

Indirect taxes involve a small tax being imposed on specified products or transactions. Typically the tax is paid by the consumer or user of the product/transaction, collected by the retailer and forwarded to the taxation authority. Once in place they are compulsory and offer varying degrees of diversity depending on the tax. These mechanisms aim to raise revenue and, in the cases of the tax on the arms trade and excise duties on tobacco and alcohol, to discourage the (excess) consumption of a particular product. In these cases there are likely to be positive spill-overs in terms of health gains. The digital tax involves a charge on traffic over the internet. It was first discussed in the 1990s and various proponents have put forward different versions of this tax. Examples include a tax of one US cent on every 100 e-mails of 10 KB sent, a charge per specific number of email messages (eg 10 cents per 1000 messages), a charge per SMS message and a charge by the quantity of information sent/received (eg for internet telephony and video). The key element is a very low charge.

Performance

Fund-raising capacity and additionality: An indirect tax could potentially raise very significant amounts of revenue:

  • A 10% tax on the arms trade market might net about $5bn per annum.
  • Digital tax or ‘bit’ tax: Internet traffic is huge and likely to increase rapidly; this tax could yield tens of billions from a broad base of users.
  • Brazil’s CPMF: a tax on bank account transactions, set at 0.38% levied on paying bills online and major withdrawals, it was raising an estimate $20bn per year and funding some 87% of the Government key social protection programme – Bolsa Familia, before it was voted down. However, there is scope globally for bank transactions taxes to be expanded.
  • The airline tax has raised around $660m over 2 years (mostly from France) this is expected to increase as more countries join (e.g. Portugal in 2009)1. Possible total revenues could amount to the low billions. At the end of 2008, Chile, Côte d’Ivoire, Democratic Republic of Congo, France, Madagascar, Mauritius, Niger and the Republic of Korea had implemented the airline tax; in addition Norway allocates part of its airline emissions tax to UNITAID.
  • Tobacco taxes: Low-income countries are estimated to raise around $13.8bn in taxes on tobacco. Of 152 countries with tobacco taxes in place the tax rate is less than 25% in around a quarter of the countries. A 5-10% increase to the tax rate could net $0.7-1.4bn per annum. A similar increase in developed countries would net $5.5-11bn. Alcohol taxes are already widespread.
  • While funding projections can be made, ultimately revenue will depend on responses to price rises associated with the tax. Any government decision to implement or expand one of these taxes for the purposes of directing the revenue stream to developing world health would result in additional funds.
    In order to estimate the size of the funds that could potentially be raised we take the example of the introduction of a very low indirect digital tax, which could be estimated to conservatively raise funds in the low billions per annum (US$3bn).

    Likelihood: There is a more obvious link between the source of the funds and the purpose (health R&D) for the tobacco, alcohol and arms trade related taxes. However, as the airline tax has shown, such a link is not always necessary to appeal to both politicians and consumers. An indirect tax like a type of digital tax can be appealing to politicians and consumers who accept a small tax across a broad base with an altruistic purpose.

    Operationality: Introducing a new tax or expanding an existing tax may require legal changes, nationally and internationally, depending on the tax, and ongoing regulation to ensure compliance. A new global tax would take longer to implement than expanding an existing tax within a country. A tax that is global in scope allows for developing countries to contribute to fundraising, and there is a willingness to do so as demonstrated by the airline tax. This framework could be applied to a type of digital tax.

    As with the introduction of any tax there are trade-offs:

    • There is only moderate certainty over revenue forecasts as actual revenue will depend on the response of providers and consumers to price rises associated with the tax and scope of the tax. Furthermore, as seen with the withdrawal of Brazil’s bank transaction tax there are occasions, although rare, when a tax is removed.
    • Some of these taxes could potentially create perverse incentives. For example, the tax on arms trade is likely to result in an increase in illicit arms trading, (and therefore reduce the size of revenue); an excessively high tax on alcohol could encourage people to consume illicit and often dangerous alcohol products. An arms tax may have less political appeal than others as governments are essentially taxing themselves.
    • Achieving a wide geographical coverage by some of these taxes internationally might be difficult as governments might be resistant to introducing them (e.g. The US is a notable omission from the airline tax citing problems with the tax dimension, but they are trying to capture the revenue through voluntary airline contributions rather than a mandatory tax.)
    • The digital tax has additional operational hurdles to overcome, in that monitoring internet traffic in a cost-effective manner in order to tax consumers might prove to be a challenge. The digital tax could place a high burden on companies that depend heavily on use of the internet and sending large amounts of data over the internet. However, this could be overcome by appropriate scoping of the tax.

The George Institute report also considered the Brazil submission asking for the taxation of repatriated pharmaceutical profits. The IFPMA had access to an advance copy of the EWG draft texts, and also to what the IFPMA described as “friendly” EWG members”, and was able to lobby against the pharmaceutical profits tax, which was not included in the final EWG recommendations sent to the EB. Surprisingly, the tobacco tax proposal was also dropped, while the taxes on arms shipments, internet bits, consumer bank account transactions and airline tickets were retained.

Judging from what is available from the WHO web site, the EWG’s work on all of the taxation proposals seemed shallow, and lacking in serious analysis. But whatever the basis of the recommendations, they are now before the WHO, having received approval from experts from 24 countries, including the US.

It is also worth repeating, again and again, that the report to the WHO EB demonstrates how the IFPMA used its access to the confidential working drafts of the EWG to protect their profits — in this specific case, to eliminate consideration of a taxation proposal put forward by Brazil to tax repatriated profits that flow from developing countries to developed countries. Regardless of how one views the Brazil tax proposal, it is clear that the IFPMA was simply acting as any lobby does — to penetrate a public process to protect its corporate interests. That this happened in the EWG process not only says something about the tax proposal, it raises doubts about the rest of the EWG proposals, which as the IFPMA told its members, a in generally highly favorable to the industry positions, particularly on topics such as the use of large end prizes, intellectual property rights and the medical R&D treaty.

The following quotes are from the original Brazil proposal for taxing repatriated profits from the pharmaceutical industry:

[T]his proposal focus on a mechanism that would be based on a fund sustained with resources from taxation on remittance of profits of the pharmaceutical industry. This fund would be used only for R&D on medicines and vaccines that address public health needs of developing countries. The available resources could be drawn upon by the pharmaceutical industry, including the ones that paid the tax in the first place, in a partnership with national public or private laboratories from developing countries, on a public-private partnership fashion. Products resulting from those R&D activities would be made available to developing countries in accessible terms.

The innovation in such a system is related to the proposal of raising a sustainable fund from the taxation of the activities of pharmaceutical companies, which could in turn use those same resources, together with partners from the developing world, to R&D for diseases that affect those countries.

Not only developing countries would benefit from the outcomes of such an endeavor but they would also be benefited from engaging in the R&D activities and be able to build capacities from the exchange of experiences and the transfer of technologies from the pharmaceutical laboratories involved in the process.

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