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.