3D Printing and Taxes

3D printing is poised to upend a lot of manufacturing and supply chain models that are entrenched in many industries, but the impact may be much wider than that. In this recent Harvard Business Review article, the author suggests viewing the potential of 3D printing through an unexpected prism: taxes.

Channing Flynn, an international tax partner at Ernst & Young, as well as the company’s global technology industry tax leader wrote the piece, and brings up a number of good points that could trip up companies adopting 3D printing as well as their respective governments.

Exactly how – and how quickly – 3D printing is adopted will obviously vary by industry and company, but Flynn’s piece outlines some of the competing economic priorities that will affect how widely the technology may be adopted.

In some instances, additive manufacturing is more cost effective than traditional milling or machining techniques. But in other applications it is presently too slow and expensive to replace traditional manufacturing. It could conceivably eliminate costly inventory by allowing companies to manufacture on demand. It could also reduce the cost of employment, capital investment, sand shipping as well. Manufacturers currently hold around $1.7 trillion in inventory, or 10% of annual GDP. Not all of these things can be printed, but that inventory does represent an opportunity for freeing up capital.

Flynn says executives should frame their analysis by balancing opportunities and threats, particularly when it comes to taxation.

Digital businesses have posed a challenge to global tax authorities, and 3D printing will be just as vexing. As an example, a product’s underlying intellectual property may be greater than its production value. As Flynn points out:

“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. This will not only challenge tax departments’ current calculations, but will also put increasing pressure on legal departments wrestling with IP asset and risk management. IP piracy will be another major complication.”

When consumers print purchased items at home, companies may be subject to value-added taxes or goods and services taxes, which in Europe can be as high as 27%. As product designs are transmitted digitally, it will change the nature of how customs duties are levied. Distributed manufacturing models will also be challenged by widely varying compliance and reporting requirements.

For companies that are building their business models on this type of distributed manufacturing system, or selling designs that can be printed by customers wherever they live, there will likely be a response from local and regional governments to what they will perceive as a threat to tax and customs revenue. Manufacturers could potentially set themselves up in tax havens and “beam” their products to customers, which is what this blog over at the International Tax Counselors posits.

You can find more information at the EY website here.