Additive Manufacturing: Considerations and Risk
April 14, 2020
Additive manufacturing, also known as 3D printing, is a manufacturing process that has been in use for decades. With the advent of more powerful computers and computer-assisted design, advances in materials and the “maker” movement, additive manufacturing has become mainstream with many schools and even individuals owning devices capable of creating intricate objects for very little cost. Even though additive manufacturing has recently become accessible to the masses, it is, at its core, a manufacturing process with vast industrial uses which include rapid prototyping, bio-printed organs and final components and products.
As a company considers additive manufacturing to produce an entire product or a component of a product, it will certainly consider the manufacturing considerations such as cost, functionality, and material specifications. It also important to consider several other topics from the accounting and legal functions that will be outlined below.
Entities considering contracting with a third-party vendor to provide products either directly to their customers (e.g. replacement parts) or as a step in their manufacturing process should explore the following major potential risk areas.
Intellectual Property Risks
3D printing devices use an electronic file which tells the printer how to construct an object. These files are usually in a handful of commonly used formats to allow different printers to interpret the instructions. Once the electronic file is transferred to a third party, the owner of the intellectual property in that file loses control over its use. The recipe for the secret blend of spices has been shared and it could be shared with competitors or other parties. The vendor could also sell the design to customers without the owner’s permission. Consider the following:
- Is the vendor in another country whose intellectual property laws are not as strict?
- What restrictions will the vendor have regarding the intellectual property?
- What contractual rights are available if the intellectual property is shared without permission?
- What safeguards are in place to ensure that the vendor doesn’t manufacture and sell the product on their own?
Outsourcing a product’s manufacturer reduces the entity’s ability to control the quality of the product and outsourcing to a 3D printing vendor is no different. Consider the following:
- Will you be able to separately track the source of the product to determine root cause for the claims?
- Will you be able track the product’s warranty claims accurately enough to provide data for an accurate warranty reserve for the accounting department?
Using a vendor in another tax jurisdiction may add complexity to your transfer pricing, if the manufacturing process is with a related party, and may impact any value-added taxes (if applicable). Consider the following:
- Understand how the new taxing jurisdiction interprets the transfer of intellectual property.
- If there is a transfer of intellectual property within a related party context, there is a de facto intercompany sale of intellectual property that may result in an exit tax. Most importantly, it requires the careful determination of an arm’s length consideration in exchange for the intellectual property.
- A licensing arrangement may avoid a de facto sale when intellectual property is transferred.
- How does the taxing jurisdiction treat the use of the 3D printing vendor (e.g., are they producing a good or performing a service)?
- Are there any changes to custom duties based upon the new arrangement?
Every situation is different and it is important to have answers that are applicable ahead of time instead of after the fact. When considering the inclusion of an external 3D printing vendor to your supply chain, make sure to include your accounting and legal teams in the discussion so that certain risks can be considered and planned for before it is too late.
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