Consider 3D printing, where digital files can be materialized a continent away into just-in-time auto parts or customized medical implants, and taxation becomes even more complex—for tangible goods as well as intangible content and services.
3D printing is in the classic technology gap: it is on track to be very disruptive to the business world—some say as disruptive as the PC in the 1980s—but will only be mainstreamed with further improvements in cost, speed and ease of use.
Some industries are well ahead of others. Nearly the entire U.S. hearing aid industry now involves 3D printing. The automotive industry—and even aerospace—has already moved beyond printing prototypes in 3D to producing actual parts. As technological and business developments accelerate, 3D printing is poised to redefine manufacturing and distribution across the business world.
Already, many CEOs have plotted their company’s position relative to this horizon technology. They have analyzed its potential strategic benefits, such as transitioning global production closer to customers, lowering supply chain inventory and customizing products on demand. Their companies are buying up 3D printing products and services at a rapidly increasing rate—with a 2014 global spend of $4.1 billion, growing 34% per year, according to research from Wohlers Associates.
However, tax implications could alter the equation for any anticipated operating efficiency or return on investment. And that is where more CEOs should turn their focus at this stage of the market’s development.
Emerging tax issues
The fundamental 3D tax question is, How will companies align 3D profits to their functions, assets and risks in a highly distributed model of manufacturing—one in which distributors and customers participate in the production process, and any part of that process might take place in any location on the planet?
Intellectual property (IP) lies at the core of this question because IP will become a larger share of any product’s value as 3D printing drives down other costs for making and shipping products. How and where 3D IP is owned and authorized for use will be critical to business relationships and the characterization of the income derived from them.
Customs duties provide a simpler example of the tax issues at stake: in global trade, it takes a cross-border flow of a tangible good to create a taxable customs event. While the raw materials or components used in 3D printers may still cross borders the old-fashioned way, more of a product’s value will be defined by intangible blueprints that traverse the globe digitally. Governments faced with losing significant customs revenue may seek new ways to tax these blueprints and other IP.
Sales taxes, such as value-added taxes (VAT), raise other evident questions. If consumers print out retail products at home, how is that sales tax assessed? Getting the answer wrong could be costly, considering global VAT rates average around 20%.
The strategic approach to 3D taxation
These are not considerations to ignore during strategic planning, anticipating that someone will hit the “reset” button later on. Other global digital business models based on technologies like cloud computing have shown the operational, profit and reputational risk that can result when strategic planners neglect tax considerations; tax-related controversies involving several major multinationals have recently played out in the press.
Given the level of strategic and business process change that will be required, CEOs should plan sooner for 3D printing. They should keep their tax teams close in evaluating their company’s 3D printing opportunities and challenges, to obtain a realistic analysis of operating efficiencies and ROI.
Finally, it is incumbent on CEOs to engage with policymakers on this issue. Policy always lags behind technology, and the resulting tax uncertainty can act as a drag on innovation. Recently extended multilateral negotiations on digital economy taxation have underscored persistent and problematic differences among countries. And they show how hard it is to make policy amid continuous innovation. For CEOs, engaging with tax authorities on 3D printing could help avert unfortunate developments at the policy level while facilitating a mutual understanding of the path ahead for their business in a 3D world.
Note: the views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.