As small and midsized companies expand their business operations across borders, they must maneuver through a web of global trade and indirect tax intricacies. With every action toward expansion comes an unequal and complicated trade and tax reaction. This case study highlights common issues and concerns companies should consider as they prepare their own global growth goals.
Opportunities and challenges
3D printing is predicted to be a significant player in the Fourth Industrial Revolution, defined at the World Economic Forum as cyber-physical systems – those that blur the lines between technology and the real world. 3D Print Now (3DPN), our hypothetical midsized business with global aspirations, is ready to charge into the Fourth Industrial Revolution with international expansion of its business and multiple sales models – or is it? Let’s learn about 3DPN’s plans and the potential challenges that lie ahead.
The team at 3DPN, based in Singapore, is extremely happy they have secured another round of venture funding. The 3DPN machines have been finalized, and the company is ready to begin production of the machines in China for export globally.
The business model
Until recently, 3DPN’s focus has only been on generating interest in its new technology, but now it wants to begin selling the machines in other countries, establishing reseller networks and creating support centers for the different machines. Since all of the machines connect to the Internet, they are also able to print items on demand for different customers and can be used to share patterns from different users through a curated marketplace.
3DPN plans to offer machines in two sizes. One size – the Big Machine – will target large factories and will help with complex printing, using a standard service agreement for repairs and maintenance. The second size – the Fun Machine – will be much smaller and will be used for home use or enthusiast needs.
The Big Machine
Clearly, the Big Machine is the more capable machine and is meant to be installed to take on specialty manufacturing tasks. It will be networked so it can take requests from throughout a company’s supply chain. However, the Big Machine will not be able to participate in the larger 3DPN marketplace; rather, it will only be able to be leveraged inside a company’s private cloud.
The goal is to sell the Big Machine worldwide and be able to provide an estimate based on the classifications of this machine to a number of different jurisdictions. Once the machine is up and running, 3DPN will provide a service and maintenance plan.
The servicing for the Big Machine will be handled by a team of service professionals that will originally be based in Singapore and will travel to sites as necessary. Over the next three years, the goal is to create local supply services centers in the US, China, the Netherlands and Mexico.
- Challenge: 3DPN should plan for the fact that once those centers are established, new indirect tax consequences could arise for the repair and replacement work.
The Fun Machine
While the Fun Machine will have more limited capability, it will be able to be installed in many different locations and would allow small artisans or manufacturers to create products at those locations. It will be available for private purchase and also for installation at printing salons. This machine will be networked and will participate in the 3DPN market- place; members of the marketplace will be able to send patterns to different “public” machines for printing. When something is sent for printing at a machine, it will be available for pickup from the machine.
- Challenge: Since the requests are sent through the marketplace, this could require 3DPN to correctly calculate the tax for the item itself which could be varied. This will be challenging because this opens 3DPN to provide tax calculation to many different locations, and depending on the size of the manufacturers or the entity, the company could be exposed to tax liability. This model would enable suppliers of items to provide finished products from their machines without having to deal with the challenges of small value goods importation which are constantly changing.
Over time, 3DPN’s goal is to have these machines become a utility that’s distributed. This fixed location could give rise to a fixed establishment in many different countries.
- Challenge: If 3DPN starts to manage and own the printers, this could require the company to calculate local taxes for a variety of information.
3DPN has a head office based in Singapore and an office based in China to help with the manufacturing work. While it currently doesn’t have operations outside of these locations, it is working on creating relationships with resellers around the world.
While selling the machines and service agreements will provide a stream of revenue for the company, the venture capital market is really excited about the company’s plans for the printing marketplace. From the marketplace, users can upload patterns and then resell these patterns in different markets.
- Challenge: In this case, as the marketplace operator, 3DPN would act to process the payments, and if necessary, remit any taxes incurred.
3DPN wants to get its products into a number of different countries in 2016, and it sees these regions as important for its success:
- North America (especially the US): The US alone has 15,500 tax jurisdictions, and 3DPN needs to keep up with rates and regulatory changes in every one in which it does business.
- Europe: It is 3DPN’s understanding that it can hit all of the EU countries in a single swoop tax- and trade-wise, but its assumption is not necessarily correct. 3DPN must ensure that it knows and understands tax reporting and export/import implications of doing business with each EU country individually.
- Latin America: This region is a bit more speculative because the company isn’t sure about how big of a market there will be in the region. Also, it is believed that this region will be very complex from a trade and tax perspective.
- Asia Pacific: Since Asia is 3DPN’s backyard, it wants to be in Singapore, Australia, New Zealand, China and South Korea by the end of the year. Although these jurisdictions have relatively simple indirect tax regimes, these countries could have very high volumes and could result in a large number of tax calculations.
3DPN is selling a very expensive product; prices would range from US$400 for a personal model to tens of thousands of dollars for a customized machine for a factory.
- Challenge: Custom duties could be a very challenging piece of 3DPN’s pricing Additionally, as the questions around the Organisation for Economic Co-operation and Development (OECD)’s BEPS Action Plan continue to swirl, 3DPN’s networked printers will push the company into the business of collecting taxes for hundreds, if not thousands, of small companies across a minimum of 40 jurisdictions. If it does end up having to pay taxes, it needs to determine how it will manage the remitting process.
- And more challenges: The company should also consider the decreasing tax-free import thresholds globally as a consequence of the BEPS reforms. This could necessitate the need to accurately track and classify the items that are printed from the 3D printers in a variety of different jurisdictions for customs and local indirect tax purposes. This would be a challenge it can avoid because it has moved the factory out from China, where it produced huge batches, into many different countries, which each produce small batches.
As the company enters the market on a global scale, its leaders should be equally concerned about how they can provide accurate information to customers about the printers, and more importantly, how the products that are printed are actually classified and taxed over time.
3DPN’s leaders believe that the company could eventually become a manufacturer for a number of items in a number of different jurisdictions. To prepare for its ambitious future, 3DPN needs to be ready to deal with a variety of different customs and tax issues.
- Challenge: The 3DPN network will also likely emerge as a major hurdle from a tax standpoint. The network will allow users to sell patterns they create to other printers. Based on network usage, 3DPN may need to start charging and remitting taxes based on the users’ address for countries like Japan, South Korea and the European Union. The network will also provide B2B transactions; although these will be relatively simpler, they will still be a challenge to maintain and manage.
As our 3DPN case study illustrates, doing business globally requires the collection and regular monitoring of tax rate and regulatory information from countless jurisdictions, as well as the tracking and classifying of goods and services provided across the same global jurisdictions – not to mention the remitting and reporting process.
This is where the benefits of automation really make the difference for a growing business. When you have a repeated business process, as 3DPN does, it’s necessary to eliminate subjectivity from the process. In a business with both high-volume and many low-volume transactions, an incorrectly handled transaction can really become a big problem in the aggregate, with cascading effects on calculation, reporting and compliance. There is an invaluable benefit in having infrastructure and technology to help your business grow – technology that is ready to grow and scale globally as your business expands.