3D printing taxation issues and impacts...3D printing taxation issues and impacts | 5 “The...

3D printing taxationissues and impactsTechnology is turning the world upside down for manufacturing and distribution

“3D printing has not transformed the economy quite yet. It’s too early to answer the countless questions this disruptive new technology will raise. But it is certainly not too early to start defining these questions and influencing the policy surrounding the answers.”Channing FlynnGlobal Technology Industry LeaderTax ServicesEY

3D printing overview

3D printing could turn your business worldupside down. What are the tax, legal andpolicy implications?

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A four-dimensional analysis of 3D printing

Time is the fourth dimension of 3D printing,a technology whose time horizon formainstream adoption varies widely bycompany, industry and geography.

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Taxation turned inside out

The business benefits of 3D printing run thegamut, but each carries a tax implication.

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Intellectual property (IP) is the threshold issue

IP sets the stage for any discussion of 3Dprinting and taxation.

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Roundup of other 3D tax issues

• Distributed 3D printing• Transfer pricing• Changing production values• Crossing borders digitally• Location, location, taxation

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Turn your 3D opportunity right-side up

Companies need to frame their 3D analysisaround opportunities and threats — toinnovate or be disrupted.

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2 | 3D printing taxation issues and impacts

In 3D printing, we once again have a newtechnology that could upend supply chains,business models, customer relationships —entrepreneurship itself. 3D printing coulddo to physical goods what cloud computingis now doing to digital services; what the PC, internet and smart mobility have doneto computing; what outsourcing did tosoftware development and businessprocessing. That is, take mass distributionand innovation to the next level, whilerealigning the very geography of work and trade.

Why address 3D now?Any significant technology that emergeshas a few things in common. It impactsdifferent industries at different times,places and levels of disruption. It posesboth opportunity and risk. And it raises tax, legal and policy implications that can trip up corporate leaders and globalpolicymakers alike as they are in full stride toward the future.

Understanding these tax, legal and policychallenges drove us to produce this report.3D printing implications for the market will be as bedeviling as the current debateover cloud taxation. And it will be aschallenging as the intellectual property(IP)issues that disrupted the entire musicindustry and as the decades-old politicaldebate over outsourcing.

Sighting your company’s 3D horizonYour company’s 3D printing horizon may be here today, as it is for some medicaldevice makers and parts suppliers.1 It mayfall three to five years out, as some predictfor the mainstreaming of this technology by certain manufacturing sectors and

e-commerce companies. It may be pushedout even further — 5 to 10 years from today — whether by intrinsic business or technological issues, or by externaleconomic and political developments.

For many companies, though, now may well be the time to begin imagining a world upside down. That’s because whichevertime horizon fits your company or industry,significant strategic and business processplanning must precede it.

Easing the path to marketThe sooner executives understand 3Dprinting opportunities and their complexglobal context, the better they can planinvestments and begin their future businessevolution with confidence in the ultimatereturns. And the earlier companies andindustries put the 3D printing valueproposition in front of their policymakers,the better their chance of avertingunfortunate 3D printing policies.

3D printing is neither the first nor the lasttechnological inflection point in the businessworld. Industries have learned a lot as theyhave globalized and digitized their businessmodels, and as they have put the case forinnovation and progress to policymakersand the public. Perhaps none have learnedmore than the technology industry as bothan innovation driver and enabler.

Now is the time to begin easing the path of 3D printing to market. We hope tofacilitate the process with our analysis ofthe taxation issues and implications thatundoubtedly will contribute to defining the3D market and its future value tobusinesses and consumers.

3D printing taxation issues and impacts | 3

3D printingoverview

What if your business worldwere turned upside down?What if tangible goodsmoved digitally, intangiblyacross borders? If globallycentralized productionmigrated to local markets?What if individual consumersturned into the producers ofgoods? Are you ready for3D printing? While thishorizon technology todayraises more questions thananswers, the horizon may be nearer than you think.


How close is the 3D printing horizon?Consider that printed jet engines alreadyexist and printed human hearts are believedless than five years away (heart componentsalready have been printed). Star Trek’sfictional food replicator may use a differenttechnology, but one food industry giant is pursuing something quite like it.

Currently, on a larger scale, it is said thatnearly the entire US hearing aid industrytoday relies on additive manufacturing (aka 3D printing).2 At a global level, mining companies are printing out spareparts at their far-flung excavation sites. At a consumer level, while early adoptersexperiment at home and in micro-enterprises,e-commerce leaders are testing digitalprinting in delivery trucks, setting up 3Dprinting storefronts that customize ondemand (imagine your own bobbleheadlook-alike), and positioning themselves asglobal platforms for 3D printing blueprintsand customer transactions.

Some companies will be affected by 3Dprinting more than others. And thoseimpacted earlier should get involved in theevolution of the policy governing 3D printingtaxation. If not, other stakeholders will.

Your own suppliers and business customersmay already be incorporating 3D printinginto their enterprises, as well — conductingrapid prototyping, introducing masscustomization, converting selectedmanufacturing and supply chain functionsto 3D printing, or even transitioning entireproducts. Whole new businesses areemerging, such as a 3D printing servicewith 20,000 connected printers worldwide,and offering multinationals opportunities to divest some or all of their manufacturingand distribution.

Long story short, some companies’ andindustries’ time horizons for mainstreaming3D printing in their operations will be farshorter than others’, along a projectedtimeline of 3 to 10 years. And pockets of 3D printing are proliferating already.

Going from classic technology gap to mainstreamTo put a number on it, the size of the global3D printing industry itself reportedly topped US$4 billion in 2014, with a compoundannual growth rate over the past threeyears of 34%.3 The industry is projected to surpass US$21 billion by 2020, as the technology matures and faster, moreaffordable printers come to market.4

However, statistics about the actual number of products produced by 3Dprinters are not yet available for analysis.

“3D printing is on track to be very disruptive. Right now, though, it is in the classic technology industry gap: the concept has everyone fired up about new possibilities, while the infrastructure to make those possibilities come true on a broad scale is still being built.” Pat HyekGlobal Technology Industry LeaderEY

A four-dimensional analysis of 3D printing

Whether your imagination’sreference point is jet engines,human hearts or even StarTrek’s food replicator, no onecan deny the extraordinarypotential and excitement about the future of 3D printing. Now, add a fourth dimension —time — and you will begin to seethe nearer-term implications ofthese machines that can tracethe length, breadth and depthof any given blueprint toproduce 3D objects.


“The taxation of goods and services has always been grounded in the physical movement of things or the provision of services — and that model is exactly what digital printing will disrupt absolutely.” Channing FlynnGlobal Technology Industry LeaderTax ServicesEY

“3D printing is on track to be very disruptive,”says Pat Hyek, Global Technology IndustryLeader, EY. “Right now, though, it is in theclassic technology industry gap: theconcept has everyone fired up about newpossibilities, while the infrastructure tomake those possibilities come true on abroad scale is still being built.”

How disruptive will 3D be?Traditionally, material objects (whetherchips, sweaters or automobiles) have beenbuilt in factories controlled by a singlecorporate entity that designs the product,manages its supply chain, constructs andsells it, directly or indirectly. 3D printing is about to kick off an era of digitaltransformation that will redefine suchclassic models.

Business efficiency is a 3D driver — with reductions projected in employment, capital investment, shipping and inventory.And, inherently, digital printing’s additivemanufacturing process promises to be lesscostly than more conventional “subtractive”manufacturing techniques.(Think aboutprinting something layer by layer instead of milling a block of material into a finalproduct.) So, too, are innovation,customization, speed and other benefitsinherent to digital printing.

As with any digital transformation,technology companies likely will findthemselves first to be upended. And as withany marketplace disruption, governmentsaround the world will sooner or later findtheir national interests at stake.

Asia-Pacific provides an exampleNational interests will certainly vary, andthe Asia-Pacific region provides a case inpoint. “If 3D printing is taking off, thenChina is going to want to be at the forefrontand do it on an industrial scale,” says Jim Hunter, Asia-Pacific Tax Leader, Ernst & Young Tax Services Ltd. “With itsmiddle class market growing to 400 million,China has a very strong base to cater to,in terms of producing products more cost-effectively.”

Among Asia’s global workshops (some ofwhich are already diversifying into 3Dprinting), higher-cost countries such asChina are likely to differ in their approach to policy and taxation from “new play”outsourcing venues like Vietnam. “Somecountries just want to be as taxpayer-friendlyas they can, to bring in manufacturing andcreate jobs,” Hunter says, “while Chinatends to be more proactive toward taxingprofits made in its jurisdiction.”

The who, what and where of digital printingThe first disruptive 3D printing question iswho owns a product’s IP. Is it the designer,the programmer who translates the designinto a printable file, the business or consumerprinting out a product — or all of the above?Some argue that each contributes to thecreative process and product value. If so,who, what and where become not onlypractical, but policy questions.

Amid all of this unprecedented uncertaintyis the question of how to tax value creationin what is beginning to shape up as a highlydistributed model of manufacturing where

distributors and customers participate in the production process — and any part ofthat process might take place in any locationon the planet.

Governing a 3D worldTax authorities around the world are alreadywrestling with many related policy and taxissues regarding services and intangiblessuch as IP, as they have been engaged in afar-reaching update of international taxmodels for the global digital economy.

They have even alluded to the comingarrival of 3D printing, in such forums as theOrganisation for Economic Co-operationand Development’s base erosion and profitshifting project (OECD’s BEPS Project).

The new approaches to taxing intangibles(i.e., IP, borderless cloud-based value chainsand consumer electronic services) all mayhave some applicability to taxing the tangibleproducts of 3D printing. However, just howapplicable remains an open question. “Andeven in instances where 3D taxation mightnot turn out to be so different in concept, itcould just become more difficult in practice,”says Stephen Bates, International TaxServices, Ernst & Young LLP.

Channing Flynn, Global Technology IndustryLeader, Tax Services, EY, poses a what-ifscenario that illustrates the challenge: “Inthe future, assume you may no longer shipcargo containers filled with manufacturedproducts via boats, trains or planes, butinstead digitally transmit productioninstructions for 3D manufacturers toproduce the products. What are thechanges in taxation policy?”

Taxation turned inside out


What if 3D printing becomesas disruptive as the PC in the1980s, when it overturned the way the world lives, works and plays?


Possible scenariosThe possible business and industry scenarios resulting from 3Dprinting are ultimately limited only by the imagination, but hereare some that quickly emerge:

• What if you could move production closer to customers the worldover via 3D printing? Customize your offerings in real time?

• What if digital printing could lower inventory throughout your global supply chain? Reduce your capital expenditures on factories and warehouses?

• What if, ultimately, it could transform your company from a vertically integrated provider of goods to a design and branding enterprise that outsources manufacturing and distribution entirely to 3D printing companies?

Opportunities aboundMapping these scenarios to recent 3D printing breakthroughs helpsbring the future into focus. Consider the implications for thepharmaceutical industry and for patients, following the US Food andDrug Administration’s recent approval of the first 3D printed pills.5

Imagine the changes afoot in the manufacturing and distribution ofconsumer electronics, since this year’s demonstration of a digitalprinter producing multi-layer, standards-based circuit boards.6

The business benefits of 3D printing run the gamut — from costsavings for human resources, inventory, factories and shipping —and on to innovation, speed to market, customization and newproducts, new revenue streams or even new businesses.

Each potential benefit carries tax implications that could alter theequation for any anticipated operating efficiency or return oninvestment (ROI). Analyzing the 3D business opportunity withoutunderstanding its tax implications can be an incomplete exercise atbest. What happens, for example, if the digital IP value overtakes theproduction value of your products as costs decline? And will your ROI analysis stand up to value-added taxes/goods and services taxes(VAT/GST) — one of many different direct and indirect taxes thatwill come into play — with rates in Europe ranging from 3% to 27%?7

Compounding any particular tax issue is the matter of complianceand reporting, involving activities ranging from country-by-countryregistrations to continually updated enterprise resource planning(ERP) systems.

While the OECD is expected in 2015 to finish rewriting tax modelsfor electronic services and other digital intangibles that wouldclearly touch on 3D printing — as IP and cloud-based digitalblueprints, for example, are shipped across borders to printers —there is little clarity about how effectively these taxes would shift to “digital tangibles.”

“Governments are already lookingto replace lost tax revenue, andpressure will likely mount for a product’s digital blueprint to becomethe taxable item or for a 3D printer to create a taxable nexus.” Channing FlynnGlobal Technology Industry Leader Tax ServicesEY


Is the IP provided as a service? Or, are youlicensing software? Selling raw materialswithout charging for the blueprint? Signingcustomers to subscriptions for IP that theycan upgrade and change? Taxation, whetherin the form of direct income tax or indirectVAT/GST, hinges on such questions.

Not only is IP a starting point for discussingtaxation, but a growing concern. It willaccount for an increasing share of aproduct’s value, as digital printing reducescosts. Current multinational tax profilesbased on minimizing tax on IP profit relylargely on non-IP related substance. Withthe anticipated shrinkage in manufacturingoperations, customer support and salespersonnel that will accompany widespreaduse of 3D printing, multinationals will havedifficulty determining the most relevantfactors for determining nexus as 3Dmanufacturing seemingly does the oppositeof what policy stakeholders are indicatingmust happen: align profits to people andtheir functions.

IP is the threshold issuefor 3D taxationIP sets the stage for any discussion of 3D printing andtaxation. How and where 3D IP is owned and authorized for use will be critical to business relationships and thecharacterization of income derived from them.

“3D printing will definitely lead the Chinese tax authority to be more critical in reviewing ownership of IP.” Andrew ChoyInternational Tax ServicesErnst & Young (China) Advisory Ltd.


In a similar way, IP has already been a flash point for tax authorities developingnew OECD models for digital services andintangibles, leading some companies toonshore IP and related functions to themarkets in which they are commercializedin products and services. This could alsomitigate some of the IP tax issues in atangible, 3D world.

Still, government pressure on IP is expectedto intensify in a 3D setting. “3D printing will definitely lead the Chinese tax authorityto be more critical in reviewing ownershipof IP, and whether it should be considered part of the contribution of the Chinesesubsidiary of foreign companies,” saysAndrew Choy, International Tax Services,Ernst & Young (China) Advisory Ltd.

Eye on rising IP piracyNo discussion of 3D IP would be completewithout touching on IP protection issues.How will you manage your product pipelinewhen customers begin printing products intheir homes?

Something like the disruption of the musicbusiness by IP piracy could be repeated inthe world of manufactured goods. “Today’sIP law will be able to mitigate this to someextent, but not perfectly at all,” says Dr. Peter Katko, Head of IP/IT/Privacy Law GSA, Ernst & Young Law GmbH.

While the technology industry isaccustomed to patent-related controversy,IP disputes surrounding 3D-printed objectsare likely to involve three other areas:copyright, trademark and, especially,industrial design protection. Theseinstruments protect, respectively,artistic/intellectual creation, elements ofbranding and product design. “Filing forindustrial design protection is a complicatedprocedure, and it’s not always sure to beenforceable — especially in the case ofprivate use,” Katko says.

“Filing for industrial design protection is a complicated procedure, and it’s not always sure to be enforceable — especially in the case of private use.” Dr. Peter KatkoHead of IP/IT/Privacy Law GSAErnst & Young Law GmbH

Business prospectNew 3D printing businessrelationships andtransactions will revolvearound the ownership anduse of IP.

Tax issueTax authorities’ focus onIP is expected to intensifyin a 3D setting.

Ask yourselfWhat will be the rightcharacterization of yourincome from 3D IP?


“Supply chains can be terribly tax-inefficient,” says Anne Freden, Indirect Tax Services at Ernst & Young LLP. “Anytransition to 3D printing, without deliberatetax planning, could end up with a structureor go-to-market strategy that is not taxefficient, that ends up with irrecoverableindirect tax in the supply chain, and thateats into margins.”

And if 3D printers eventually becomefixtures in consumers’ homes, much of thetaxable value may migrate to the end of thesupply chain. The current VAT system islargely premised on the notion that fullvalue is delivered to the consumer, whichis how the sale is taxed today. Capturing the full value of a 3D sale could be morechallenging. “One can foresee governmentsneeding to react to make up for lostrevenues — even raising VAT rates,” says Freden.

Distributed 3D printing will trigger new VAT issuesInnovative companies today are looking for ways to getproducts to market faster, move away from more traditionaldistribution models, go direct to retail outlets or direct toconsumers and become more flexible in adapting products tolocal markets and customers. 3D printing takes this ongoingre-evaluation of supply chains to the next level. And, sinceVAT/GST is a tax on the value added by each actor in a supplychain, clearly there will be ramifications when using 3D to fanout production and distribution.


Whether in the supply chain or the customer’s home, IP and thecharacterization of income will be key totaxation, as discussed above — whether asale involves a service, good, software or alicense. And there are more tax questions:Where is the IP housed? Where is it beingexploited? Who owns it? Is title beingtransferred? If so, when? “All of this willneed to be determined within the 3Dprinting environment to figure out how it will be assessed from an indirect taxperspective,” Freden says.

Unanticipated VAT can wreak havoc onpricing strategies. And, if not managedeffectively, VAT can quickly become a realcost to companies, as a result of VAT notcharged to customers and paid over to taxauthorities — or due to missed opportunitiesfor recovering VAT on costs in the supplychain. Global VAT rates average around20%, with penalties for noncompliancecommonly up to 100% of the VAT due.

Additionally, administrative costs can beconsiderable, including registering for VATaround the world and continually updatingIT systems to reflect variable and changingVAT rates in different countries.

“Supply chains can beterribly tax-inefficient.”Anne FredenIndirect Tax ServicesErnst & Young LLP

Business prospectCompanies look to getcloser to customers andfaster to market using 3D printing.

Tax issueUnanticipated VAT/GSTcan hurt profit margins.

Ask yourselfWould your VATobligations proliferate in a 3D-enabled supply chain?

Note: VAT is known as GST in some global jurisdictions.


Think what might happen as 3D printingbegins to flatten global supply chains —replacing warehouses and global or regionalproduction facilities by instead printing anddistributing products closer to the customer.Consider, for instance, a multinational usinga related company as distributor in a givencountry. Once that distributor beginsprinting replacement parts, it could beconsidered a factory. The related transferpricing would change, but it is unclear howor by how much under current tax laws.

Transfer pricing faces new calculations inflattening supply chainsEvery time a company changes its supply chain, it needs to change its transfer pricing. Multinationals may know this already, since they continually adjust their intragroup/intercompany cost sharing of taxable functions, risks andassets across worldwide operations today. What they are lesslikely to know is how much 3D printing could test existingtransfer pricing models.


“We’re entering a new world, and there are few comparables in the current world of manufacturing,” says Al Paul,International Tax Services, Operating ModelEffectiveness, Ernst & Young LLP. “Modelsfor contract manufacturing or consignmentmanufacturing may be used by analogy, butthey are not exact.” All of which could leavetax authorities without their usual referencepoints for calculating the range of tax toapply — and leave corporate strategists upin the air, as well.

And while transfer pricing of services and intangibles already is challenging forcompanies and tax authorities alike, it could become even more challenging as the function, risk and asset footprint likelywill change due to the introduction of 3D printing into company supply chains. Plus, as the manufacturing of tangibleproducts becomes more geographicallydistributed, it will encounter rules that oftenchange from jurisdiction to jurisdiction.

“We’re entering a new world. It is going to create havoc on existing transfer pricing models.” Al PaulInternational Tax ServicesOperating Model EffectivenessErnst & Young LLP

Business prospect3D printing could flattensupply chains.

Tax issueFew comparable models exist in currentmanufacturing anddistribution settings to calculate transferpricing and associatedtaxes in a 3D world.

Ask yourselfHow would 3D printingchange the global footprintof your functions, risksand assets?


Arguably, as 3D printing begins to cutproduction costs, the percentage of a product’s value that resides in any givenmanufacturing location could begin todecline as well. Say the cost ratio today is 80% manufacturing to 20% design/IP. In a 3D printing world, ratios could evolve to 60/40, 50/50 or 40/60.

Changing productionvalues raise the risk ofdouble taxation“In a 3D printing world, the value of your product becomesmore intangible than tangible,” Hunter says. As we have seenabove, this sweeping change could produce plenty of grayareas surrounding IP, 3D printing and taxation.


Geographically, then, where is the base of a product’s profit located and who gets theright to tax it? Tax authorities in differentcountries could come up with differentanswers to this question.

A primary purpose of bilateral tax treaties is to avoid imposing the cost of double-taxation on multinationals. But cross-border tax issues can be difficult to resolve,even where countries have reached anagreement in principle, because there aredifferent political motivations and diverseschools of thought about how corporatetaxes should operate.

Consider a product designed in the US and digitally printed in China. While USauthorities may say that the “lion’s share”of product value remains in the US, for taxpurposes, Chinese authorities may see itthe other way around.

“Then, you could find companies double-taxed on the same profit,” Hunter says.“Companies have to come up with astructure and controversy plan that at least gets them to single-taxation.”

“In a 3D printing world, the value of your product becomes more intangible than tangible.” Jim Hunter Asia-Pacific Tax LeaderErnst & Young Tax Services Ltd.

Business prospectA product’s value comesmore from its IP than fromproduction costs.

Tax issueTax authorities in differentcountries could disagreeon the appropriate split oftangible/intangible values,resulting in double taxation.

Ask yourselfWhat structure could your company use toensure single taxation?


Such cross-border calculations couldbecome a whole new equation, as theincreasing placement of 3D printers in local markets changes global trade flows.While the raw materials or componentsused in 3D printers certainly may still crossborders the old-fashioned way, more of aproduct’s value will be defined by the digitalblueprints that invisibly traverse the globe.

Another key point in this regard is that the raw materials may be lower in valuethan parts or products that would otherwiseincur customs duties. “Governments will be looking to replace lost tax revenue, andpressure could mount for a product’s digitalblueprint to become the taxable item,” says Flynn.

Crossing borders digitally, 3D printed productsconfound customsCompanies and governments often find themselves contestingthe value of imports, as products are shipped across bordersand through customs controls. Both sides of the argumenthave a good cause. For companies, customs duties are agenerally unrecoverable cost of doing business that directlyimpact margins. For governments, customs duty collectionremains an important contribution to the national treasury.


“In global trade, you have got to have a cross-border flow of a tangible good for it to create a taxable customs event,” addsMichael Heldebrand, Indirect Tax Services,Global Trade, Ernst & Young LLP. In globalsupply chains deploying 3D printers toserve local markets, taxable events mayinclude the one-time import of the printeritself, as well as the sourcing of rawmaterials or components.

The flip side involves export controls, aimedat keeping certain technologies out of thehands of foreign governments and actorsthat are considered a threat. While this is more of a trade issue than a tax issue,export controls can present opportunity and compliance costs. “Advanced countries in the EU and the US will be very protective of what the printers can do and what they cannot do, and you maysee specific restrictions on 3D printers,”says Heldebrand.

Other rising trade matters could determinethe inclusion of digital printing in free trade zones, under free trade agreementsor in tax incentive programs aimed atdeveloping national 3D competencies andhubs. Japan provides a case in point. “TheJapanese government has an ambitiousprogram to develop the world’s best 3Dprinting, technology and software for a widerange of global industries,” says Amit Ranjan,Ernst & Young Advisory Co. Ltd.

Business prospectCompanies rely more on digital technology to distribute products.

Tax issueWith fewer final products crossing borders, governmentscould see their revenuefrom customs duties fall.

Ask yourselfWhere are the taxableevents in your new 3Dsupply chain, if not atcustoms control?

“In global trade, you have got to have a cross-border flow of a tangible good for it to create a taxable customs event.” Michael HeldebrandIndirect Tax ServicesGlobal TradeErnst & Young LLP


Could a 3D printer in a supply chainconstitute a fixed place of business — ataxable PE in a particular jurisdiction?Several variables could affect the answer to this question, including different printerownership structures, control of printer use and revenue from designs used by the printer. Each one may carry a risk,especially as tax authorities around theworld seek to lower PE thresholds as part of the OECD BEPS Project and national tax policy.

And whether a company owns the 3Dprinter in the customer’s local country or,alternatively, licenses the customer rights to print products on their own, 3D printingwill likely prompt the OECD to expand theanalysis of PE to include these models.

The flip side of this discussion involves exittaxes, which can be assessed as a companymoves operations out of a given country. Forexample, some countries have determinedthat when companies take their domesticallydeveloped IP and then transfer those rights

“Could vertical distribution models become athing of the past? In this scenario, third-party 3D printing companies would handle much ofmultinationals’ manufacturing and distribution, mitigating tax issues like PE, transfer pricing and compliance.” Alex PostmaGlobal Director International Tax Services Ernst & Young Tax Co.

Location, location, taxationThree more highly location-sensitive tax matters that could ariseas traditional manufacturing becomes more globally distributedvia 3D printing are permanent establishment (PE), exit taxes and“substantial contribution” provisos.


to an overseas affiliate, there may be taxdue upon exit. The rationale, roughly, isthat the home country and its infrastructuresupported the buildup of the IP and itsbusiness potential, but was left for moretax-beneficial shores at the point ofprofitability (ergo, no domestic taxrevenue). In such situations, for example,the US federal tax rate alone could be as much as 35% of associated income over a period of years.

Enter 3D printing. Countries will havevarious impacts as taxation of profitsrelated to commoditized 3D printing suffer,but those with control over the printingmaterials, supplies and manufacture of theprinters themselves will see a boost toincome tax profits. This is even before theanalysis of the customs and duty taxationimpact. And tax authorities should be ableto see just how much revenue is goingoverseas due to standard country-by-country tax reporting that is now cominginto effect under OECD guidelines.

However, the baseline issue will be how toassign value to any IP perceived to havebeen migrated overseas, when offshore 3D printing is introduced into the globalmanufacturing model.

Meanwhile, the analysis under the US taxcode’s “Substantial Contribution Test” may become increasingly complicated by the introduction of digital printing intomanufacturing models. This is a US-centrictest that focuses on how much control acompany exercises over the manufacturingprocess through the activities of its ownemployees (e.g., manufacturing controlfunctions, such as procurement, qualityassurance and capacity planning).

Although US companies are generally taxedon worldwide income, taxation of foreignearned profits of a controlled foreigncorporation (CFC) can be deferred untilrepatriated provided, for example, that theforeign subsidiary “manufactures” productsor controls (i.e., “substantially contributes

to”) the physical manufacturing of a third company. “When you throw in 3Dmanufacturing, it may draw into questionhow a company can ‘substantially contribute’to the manufacturing process when itscustomer prints off a part,” says Paul.

If, instead, a related company, rather than a customer, prints a product on behalf of a principal manufacturing company, that may also increase the risk of additionaltax exposure.

“The tax challenge we will have, as in every industry, is how do you untangle the value chain?” Stephen BatesInternational Tax ServicesErnst & Young LLP

Business prospectProduction locationsmultiply in 3D-enabledsupply chains.

Tax issueSeveral location-relatedtax issues could emerge,including PE, exit taxesand substantialcontribution provisos.

Ask yourselfWhere might yourcompany begin makingmoney via 3D printing,how, and how will it be taxed?

Turn your 3D opportunity right-side up


What if 3D printing does indeed turn your business worldupside down and your tax profile inside out?

How would your company make money in a world whereyour products become more intangible than tangible, yourconsumers become producers and local digital printers draw production back from outsourcing arrangements in the global workshops of Asia and other shores?


“Don’t ask ‘what is my 3D printingstrategy?’ Ask ‘what is my business strategy in a world becoming more and more dominated by 3D printing?’”

David JensenGlobal Innovation and Digital Strategy LeaderErnst & Young LLP


Opportunity analysis• What would be the cost/benefit of

flattening your supply chain and moving production closer to your markets?

• How could digital printing heighten your innovation, product development and speed-to-market?

• How could digital printing and its promiseof mass customization change your relationships with customers?

• Are there entire new lines of business that your company could only execute in a 3D world?

• Are there operations you would shed?

Threat analysis• How could 3D printing upstarts exploit

these benefits of speed, cost and customization to compete against you?

• How will you protect your IP from piracy or other loss of value?

• Could your brand face quality erosion or other damage as your designs are distributed and modified in a shared economy model?

• Could your 3D business proposition be undermined by tax costs?

Preparing for 3DCompanies need to frame their 3D analysisaround opportunities and threats — toinnovate or be disrupted. “Don’t ask ‘whatis my 3D printing strategy?’ Ask ‘what is mybusiness strategy in a world becoming moreand more dominated by 3D printing?’” saysDavid Jensen, Global Innovation and DigitalStrategy Leader, Ernst & Young LLP.

Flynn adds, “Many companies tend toignore the tax implications of theirinvestment and operational decisions until the final analysis — and then have to hit the ‘reset’ button. This acts as a drag on companies trying to operate at the speed of innovation.”

Lessons learnedLessons can be drawn from the recenthistory of cloud computing and its suddenexplosive impact on global business.

One lesson is to plan sooner for 3D, in order to seize the opportunity andmitigate the risk posed by upstartcompetitors and defecting customers.

Second, keep your tax team closelyengaged in your strategic development, for realistic analysis of potential businessefficiencies and ROI.

And third, engage earlier with policy-makers to coax 3D policy and taxation into step with this new technology and its promise for business innovation.

Above all, start imagining your businessworld upside down. Understand that it won’t be easy to turn it right side up again. If you begin planning now, though,time may still be on your side.

“To remain viable in the digital economy, companies must be nimble, flexible and entrepreneurial — capable of transforming at the speed of innovation. In such an environment, tax risk is at an all-time high. And your tax planner becomes your best defense — so make sure that tax has a seat at the decision table.”Channing FlynnGlobal Technology Industry LeaderTax ServicesEY

Imagining your businessworld upside down


Sources

1 “Why you can’t ignore 3D printing,” Australia Financial Review, 2 June 2015, via AFR website, Fairfax Media Publications PTY LTD, 2015.2 Ibid.3 “Wohlers Associates Publishes 20th Anniversary Edition of its 3D Printing and Additive Manufacturing Industry Report,” Wohlers Associates website,

www.wohlersassociates.com/press69.html, 6 April 2015. 4 “2015 Roundup of 3D Printing Market Forecasts and Estimates,” Forbes.com, 31 March 2015, Forbes.com LLC, 2015.5 “Your Pill Is Printing: FDA Approves First 3-D-Printed Drug,” npr.org, article dated 4 August 2015, accessed via www.npr.org, © 2015 NPR.6 “The World’s First Multi-Layer 3D Circuit Board Printer,” 3Dprinting.com, article dated 3 June 2015, accessed via 3Dprinting.com, © 2015 3DPrinting.com.7 “New VAT tax rules are making a mess out of online retail in Europe,” Quartz, 24 February 2015, via QZ website, Quartz, 2015.

Technology sector leader

Pat HyekGlobal Technology Industry Leader+1 408 947 [email protected]

3D printing article contributors

Al PaulInternational Tax ServicesOperating Model EffectivenessErnst & Young LLP+1 202 327 [email protected]

Alex PostmaGlobal Director International Tax ServicesErnst & Young Tax Co.+81 3 3506 [email protected]

Amit RanjanPerformance Improvement Ernst & Young Advisory Co. Ltd.+81 3 3503 [email protected]

Technology service line leaders

Channing FlynnGlobal Technology Industry LeaderTax Services +1 408 947 [email protected]

Jeff LiuGlobal Technology Industry LeaderTransaction Advisory Services +1 415 894 [email protected]

Dave PadmosGlobal Technology Industry Leader Advisory Services +1 206 654 [email protected]

Guy WangerGlobal Technology Industry LeaderAssurance Services +1 650 802 [email protected]

Technology Tax contacts

Jess MartinGlobal Technology Tax Resident+1 415 894 [email protected]

Olga KoshelkovaGlobal Cloud Computing and Technology Tax Resident+1 703 747 [email protected]

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Stephen BatesInternational Tax ServicesErnst & Young LLP+1 415 894 [email protected]

Andrew ChoyInternational Tax ServicesErnst & Young (China) Advisory Ltd.+86 10 5815 [email protected]

Anne FredenIndirect Tax ServicesErnst & Young LLP+1 415 894 [email protected]

Michael HeldebrandIndirect Tax Services, Global TradeErnst & Young LLP+1 408 947 [email protected]

Jim HunterAsia-Pacific Tax LeaderErnst & Young Tax Services Ltd.+85 2 2849 [email protected]

David JensenGlobal Innovation and Digital Strategy LeaderErnst & Young LLP+1 213 977 [email protected]

Dr. Peter KatkoHead of IP/IT/Privacy Law GSAErnst & Young Law GmbH+49 89 14331 [email protected]

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