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Japan-based pharmaceutical company Kyowa Kirin Co., Ltd. struggled with managing international tax issues. A “One System” approach helped.
The better the question
A method for balancing global business growth and tax governance helped Kyowa Kirin.
Kyowa Kirin is a Japan-based global specialty pharmaceutical company. The corporation upholds its mission to create life-changing value and bring smiles to patients by providing medication for diseases lacking effective treatment. The company is committed to research and development, striving to provide medication to patients with intractable diseases and rare conditions.
Since launching sales of its global products in 2018, Kyowa Kirin has expanded its value chain extensively across global markets, experiencing rapid global growth and thus increasing its need for managing global tax compliance. Kyowa Kirin aims to provide pharmaceutical products to patients to address unmet medical needs, and achieving this goal would not be possible without addressing this issue.
It has 35 consolidated subsidiaries worldwide, and its global business is structured as a matrix organization – called “One Kyowa Kirin” – consisting of the four regional axes of Japan, EMEA, North America, and Asia/Oceania, its product axis, as well as its trans-regional functional axis, an essential element of a pharmaceutical business.
In 2023, Kyowa Kirin’s sales outside of Japan accounted for as much as 65% of its net sales, and the company saw an increase in complex transactions across different countries and regions.
Various divisions are involved in the value chain for supplying pharmaceuticals to the market, including R&D, manufacturing, quality assurance, regulatory affairs, and pharmacovigilance. Kyowa Kirin’s value chain extends worldwide, and disruption to any of these business processes would introduce significant business risks.
Within the One Kyowa Kirin structure, there was a difference in the pace of business between the business side and the tax side. While the business side operated the functional axis to standardize business activities at a global level, the tax side was based on regional (country) axis to fulfil the responsibility of a multinational corporation, that is, correctly managing and allocating profits and expenses to each country and region.
In addition, the implementation of a budget management system suited to global business activity overlooked intra-group, entity-to-entity transactions which were out of the scope of budget management, making forecasting difficult for each country and entity. The company was confronted with the possibility that balancing management for business budget and finances would become a group-wide issue.
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Read moreThis highlighted the need for Kyowa Kirin to channel its effort into global business management and group tax governance as a means of optimizing overall costs, thereby establishing a foundation for allocating internal resources to expeditiously provide treatments to patients with diseases lacking effective treatment, and in turn, upholding Kyowa Kirin's vision.
Noriko Ishizaka, Finance, Global Tax Planning Group Head of Kyowa Kirin Co., Ltd., recalls, “The situation had become complicated to the extent that we would joke with the operational departments when aligning our approaches that it would be great if there was a country named ‘Global,’ and we could be their taxpayer. However, we were aware that what we were seeing could potentially become a critical issue and had begun to give serious consideration to a solution.”
“We needed to bridge the gap between management’s vision of promoting global collaboration, and the obligation to address tax compliance through extremely effort-consuming tasks to accurately analyze and invoice consideration for services provided by each of our entities,” she said. “In order to resolve this issue, we concluded that we would need, first a deep understanding of the latest tax systems, and second an effective system design.”
Before the collaboration within this project and the implementation of the BEPS international taxation framework, Kyowa Kirin and the EY team had already worked together in an advisor-advisee relationship and were gaining knowledge of each other’s business and experience.
The better the answer
The One System was the solution to integrate operations. It reduced work time and implemented an efficient system suitable for overall management.
The project started with organizing all cross-border transactions, and eventually evolved into creating a tailored system custom-designed for Kyowa Kirin, which can be leveraged for management strategies.
The project launched in 2022. A team of EY specialists with experience in domestic and international tax and CCH® Tagetik, a business management system provided by Wolters Kluwer, has been established. They started working with Kyowa Kirin as a one team to help resolve Kyowa Kirin’s issues, including its cross-border transaction issues, and by extension, its overall business management issues in relation to global tax methodologies.
The project team began with identifying and organizing tasks related to cross-border internal transactions and other overall tax matters. The team inventoried tax issues that arise with intra-group transactions, to re-establish a workflow that would be viable for managing both budgets and results.
“The system that we were attempting to build did not exist anywhere but in my head,” Ishizaka said. She added she could feel the system becoming a reality from repeated discussions held with the team.
“A system that is compliant with tax regulations can be elaborate to the point of limitlessness,” Ishizaka said. “However, an overly elaborate system is of no value if it cannot be used practically, so our team focused on building a framework for regulatory compliance that was realistic and rationally incorporated the essentials.
The team built a system that links appropriate allocation data and simultaneously attempts to resolve the real business issues for Kyowa Kirin, by acting as the hub for existing budget and accounting systems.”
It also developed a system able to automate issuing invoices and calculating expense allocations between foreign-related parties, significantly reducing the time required for the relevant teams.
EY professionals devised a framework with a comprehensive solution that seamlessly integrates and standardizes the hundreds of invoices between related parties and operations conducted separately in each region into one unified system.
“Following the system workflow has guided us to accurately manage budgets and conduct invoicing,” Ishizaka said. “We feel a great sense of accomplishment in being able to create a ’lighthouse’ that we can trust and use as a guiding light through the course of our work.”
Additionally, the system is equipped with functions that automatically link tax allocation data with the budget management and accounting system, and that automatically generate standalone, consolidated profit and loss statements in each region per product or entity.
“We believe that the greatest achievement of this project is not simply the standardization and reduction of work hours required for our processes and operations, but rather the provision of financial and tax data needed for accurate management decisions,” Ishizaka said.
“We were able to provide management with a reliable source of information, which allows them to quickly obtain accurate financial and tax information essential for business management, as well as to organically leverage that information to introduce more effective business management policies and decision-making.”
Ishizaka said she believes the system has not only resolved short-term challenges but has also made contributions in the mid-to-long term by providing life-changing value and bringing smiles to more patients sooner than would have been possible without the system.
The better the world works
Kyowa Kirin is advancing the system to its final form for comprehensive management of its business.
Through this project, Kyowa Kirin optimized overall costs by focusing efforts on global business management as well as group tax governance. This established a reliable source of information, which will eventually lead to providing what the company calls life-changing value and bringing smiles to patients.
With the system established, Kyowa Kirin was able to optimize the invoicing between the group companies’ services and global expenses.
The project has the potential to leverage the large volume of financial data for the future – by invoicing royalties and individual services through the system, establishing a structure that links those invoices to both budgets, estimated data and results, and finally expanding the scope of the system so that it oversees all transactions within the group.
“Going forward, we aim to develop the system to the extent that it is capable of comprehensively understanding and managing our overall global business,” Ishizaka says.
Getting the project team comfortable with the required tools was an important factor, she says. “The tools determine what is viable within a system. Creating a good system requires a good combination and balance between requests from potential system users and what is viable with the tools provided,” she adds. People with knowledge of the CCH® Tagetik system who were assigned to the project team and the team’s passion for innovation were critical to success, she adds.
Motohiko Kawaguchi, CFO of Kyowa Kirin Co., Ltd., says that the respective experiences of the EY team and the Kyowa Kirin team led by Ishizaka were leveraged effectively through working as one team, and were pivotal in the successful execution of this project.
“Though systems often fail to meet initial expectations when they are completed, we have received feedback at global CFO meetings and on many other occasions that the project team really did create an incredible system,” Kawaguchi says.
Kawaguchi says he is excited to see how the project will unfold. “I believe that this system has the potential to go further. I am looking forward to seeing innovative teams use this system as a foundation to formulate more excellent ideas.”
Now that the project has concluded its initial phase and entered the next step, Ishizaka intends to leverage takeaways from the challenges that the One Team overcame together in order to increase the potential of the system. Kimiya Yamaguchi, the partner at Ernst & Young Tax Co., who worked on the project is eager to continue supporting the project’s developments.
“I believe that the system we’ve created together has great potential to be developed further,” says Yamaguchi.
“We are thankful that EY assigned a team who were very familiar with the process and system for us to conclude the initial phase of this project, and established a structure that will allow us to transition to the next phase,” Ishizaka says. “Hopefully, we will be able to leverage the knowledge that we have accumulated through our work to date.”
Difficulties can arise on a project when team members have very different skills and background. With its purpose to build a better working world, helping to create long-term value for clients, people and society and build trust in the capital markets, EY’s strength is the ability to resolve issues through the close collaboration between professionals with these different skills.
This project was a prime example of a successful, balanced collaboration between professional service by EY partners such as international tax and digital transformation and professionals with diverse experience, including tax, consulting, and technology.
Ishizaka concludes, “It was reassuring that the project team included people who were knowledgeable about the system and people with tax expertise, especially when we were working together as One Team.”
This project to build Kyowa Kirin’s system for the tax management of cross-border transactions is expected to continue guiding the corporation in its global management strategies.
