Would a digital border tax slow down adoption of 3D printing?

Global revenues from 3D printing (3DP) have been rapidly growing by almost 30% a year over the past 30 years, but still they accounted for less than 0.1% of global manufacturing revenues in 2018, as shown in the figure below.

So far, higher unit cost and longer production times than traditionally volume-manufactured goods have led to low 3DP global adoption rates. This has been the case despite the fact that currently no customs duties are applied to 3DP files crossing borders. But what could change if such duties became the norm?

3D printing is often used to produce custom-made objects, such as dental aligners, hearing aids and shoe midsoles; or objects that have seemingly impossible forms. We naturally tend to focus on the actual physical printing. Behind the scenes, however, computer-aided designs (CAD) are the digital files that carry all the critical information to print the object.

In a globalized world, these digital files often cross borders, and are considered “electronic transmissions”. Thus, they fall under the scope of a so called “moratorium” on duties on electronic transmissions under the World Trade Organization (WTO) framework, regardless of whether they are considered goods or services.

The moratorium dates back to 1998, when WTO Members agreed not to impose customs duties on electronic transmissions for two years. Ever since, it has been rolled-over at every Ministerial Conference of the WTO without much controversy, until recently.

As more digital goods and services, such as e-books, streaming videos and online education are traded across borders, some countries started to argue in favour of making it permanent, to facilitate more digital and offline trade; while others want to lift it to increase customs revenues, amongst other reasons.

In December 2019, WTO Members extended it again through to June 2020 when the next senior trade meeting will take place in Nur Sultan, Kazakhstan. At the Organisation for Economic Cooperation and Development (OECD), discussions continue on international corporate taxation in the context of the digital economy – a distinct topic from tariffs paid at the border, on physical or virtual products.

Here are a few questions to consider on what the moratorium means for 3D printing.

What would keeping the moratorium mean for 3DP? Holding off on digital duties would most likely promote 3DP adoption due to lower trade friction costs. This might even encourage innovation, as CAD files could be created collaboratively across borders, for instance using a cloud-based solution. It could also contribute to levelling the playing field among countries for 3DP adoption. There will be no customs duties that might influence firms on how to distribute their value chains around the globe.

Would digital duties slow down 3DP? They might. Moreover, as 3DP becomes integrated into existing manufacturing processes, firms are likely to consider which countries tax e-transmissions when deciding where to operate. Thus, digital duties will not just affect 3DP adoption as a niche area, but will have wider implications in a broader spectrum of industries and in trade.

How would countries impose digital duty for 3DP? Levying customs duties on 3DP files would require the same level of control over digital trade as physical trade. Technological capabilities are likely to be needed to track digital flows, and their availability might differ among countries. The cost of acquiring these capabilities and the actual enforcement of customs duties on e-transmissions may also vary, and in some cases, be high. This is key in order not to enlarge the “digital divide” from yet another perspective.

How would the duty be calculated? Customs officials will need to work out how to assess the value of 3DP files. This is not a theoretical question as policies have already been introduced to capture digital products in national tariff systems (although for now the duty is 0%).

The first question is whether 3DP files are considered goods or services. If 3DP files are considered services, then services are rarely, if ever, taxed at the border, and the possibility of applying customs duties will depend on commitments made under the General Agreement on Trade in Services.

If 3DP files are treated as goods, new challenges emerge. The WTO Valuation Agreement uses “transaction value” as the primary basis for defining customs value for goods, which is key for calculating duties. This approach could prove hard to apply to some digital products. Software, for example, is typically not subject to a sale transaction but rather to a licensing agreement for its use. Payments for software may be made by subscriptions, periodic payments or other means, rather than through a one-time payment at the time of the sale.

The value of 3DP files could be even harder to define as it will depend on the subsequent number of printings in the destination market. Unlimited number of prints could be made from a single 3DP digital file. Thus, consideration should be given to alternative approaches to track the future use of 3DP files – through blockchain technology, for instance – with deferred customs duty payment.

What other options are available? VAT or sales tax may be a more practical alternative to customs duties. Applying VAT or sales tax to 3D files would be feasible, since the principle of destination is widely accepted. Some countries, such as Australia, Switzerland, India and the European Union, have taken this direction with the goal of achieving equity in consumption tax between domestic and foreign actors in digital trade transactions of goods and services.

Various issues arise at the intersection between digital trade and tax policy – 3DP highlights some of these. As a rapidly developing technology, 3DP also brings impacts and challenges in other areas, from digital manufacturing and global supply chain to environment and sustainability.

In this context, the World Economic Forum issued a White Paper to provide guidance on how to deal with these business and policy challenges. Governments, business and other stakeholders can start planning based on different potential scenarios, to maximise the benefits and cope with the disruption of technological change.

Read the full report on “3D Printing: A Guide for Decision-Makers” here.