Tax Reform Objectives
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.
Tax systems in other countries provide numerous advantages that the U.S. does not, such as: lower corporate tax rates, 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, while U.S. tax code puts American companies at a distinct disadvantage.
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 $1B 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%.
Corporate Rate Parity
Currently, the U.S. combined federal and state corporate tax rate is 39.2%, approximately 14% above the OECD average of 25%. The U.S. rate may soon become the highest if Japan follows through with its initiative to lower its corporate income tax rate.
Several countries outside the OECD are actively pursuing the semiconductor industry, and these countries have corporate tax rates well below the U.S. rate. For example, the tax rate in China is 15%, 25% in Malaysia, 17% in Singapore, and 17% in Taiwan. Most of these countries offer 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
Territorial Tax System
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 to 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.
The specific details of any new territorial tax system should include consideration on certain exemptions and clear definitions on anti-avoidance rules.
Permanent and Enhanced R&D Tax Credit
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 is weak compared to other countries. 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:
· Broadening the R&D tax credit to include capital assets, including machinery and equipment and real property, purchased explicitly for research and development;
· Providing an R&D credit that is refundable and not dependent on realization of taxable income (e.g., start-ups and companies with net operating losses);
· Making consortia R&D an eligible expenditure; and
· Providing payroll tax reductions and similar incentives for new entrants into innovative R&D to defray certain initial costs for start-ups.
SIA Calls Upon Congress to Bolster U.S. Innovation Through the R&D Tax Credit
Congress must pass a seamless, strengthened and permanent U.S. R&D tax credit this year.