SIA Semiconductors

Policy Priorities

Tax

The U.S. tax code puts American companies at a distinct disadvantage. Other countries provide lower corporate tax rates, more robust incentives for R&D, territorial tax system with no taxes on international operations, and other preferential tax treatments. These substantial tax incentives offer a significant advantage in the global marketplace. 

For example, the cost of building a new, state-of-the art (300mm wafer) semiconductor manufacturing facility (or “fab”) is $5-$6.8 billion. Using a 10-year net present cost analysis, the same facility would cost $1 billion less to build in a non-U.S. location. The bulk of this cost differential (70%) is due to lower tax policies. Capital grants comprise 20% of the difference, while labor costs represent only 10%.

SIA supports three key steps for growing investments, creating jobs, and spurring the economy through a more competitive tax system. The U.S. should:

  • Reduce the corporate tax rate to align more closely with globally competitive rates.
  • Adopt a territorial tax system similar to those used by most global competitors.
  • Enact permanent, robust incentives for research and innovation competitive with other countries.

Currently, the U.S. federal corporate tax rate is 35%, the highest in the OECD and well above the OECD average of 25%.  

Several countries outside the OECD are actively pursuing the semiconductor industry by offering substantial tax “holidays” for the industry which effectively lower rates to zero or single digits. Taiwan and China each offer five year holidays with extensions possible, while Singapore offers a 15-year holiday to qualified “pioneer” companies.

*Note: Tax holidays targeted to semiconductors lower overall rate to zero or single digits.

Most foreign competitors to U.S. semiconductor companies operate under a territorial tax system, where income earned by foreign subsidiaries is not assessed domestic income tax.  Profits are only taxed by the country where the income is earned, and there is no penalty for foreign subsidiaries to return profits and cash to their home country. In fact, all other G-7 and nearly all OECD countries use territorial systems.

Semiconductors are an export-oriented product, with 82% of U.S. firms’ sales to customers overseas. As a result, on average over the past five years, semiconductors have been the United States’ top export. Thus, the industry has a unique perspective in the need to move towards a territorial tax approach.

Meaningful tax reform should move toward a territorial tax approach, subjecting U.S.-based companies to tax only where products are sold. Eliminating the disadvantage of the U.S. worldwide taxation approach would unleash domestic investment, allowing American companies to make financial decisions on R&D, capital acquisitions or distributions to investors based on sound economic principles that will allow U.S.-based companies to meet foreign competitors head on.

Finally, comprehensive tax reform should provide strong and permanent incentives to invest in U.S. research and development. The U.S. semiconductor industry invests 17% of sales into R&D, the highest percentage of any industry.

The R&D tax credit has lapsed 13 times over the past three decades and expired on Dec. 31, 2013. In 1981, the U.S. pioneered the R&D tax credit, but today it ranks 23rd out of 28 OECD countries.

To encourage investment in innovative R&D, SIA recommends:

  • A seamless extension of the R&D credit retroactive to Jan. 1, 2014.
  • Raising the rate of the Alternative Simplified Credit from 14 percent to 20 percent.  



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