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How the Senate’s Tax Bill Could Impact Semiconductors

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Part 3
How the Senate’s Tax Bill Could Impact Semiconductors PART 3 OF 11

A Closer Look at the Senate’s Tax Bill Amendments

Tax bill amendments

The US Senate’s amendments to reduce the total cost of the tax bill after analysis showed that the bill would add $1.4 trillion to the budget deficit over the next ten years. But the Senate has tried to ensure that the very purpose of tax reform hasn’t been diluted in the version of the bill that it has passed.

A Closer Look at the Senate’s Tax Bill Amendments

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Expensing capital spending

The Senate has made the provision of expensing capital spending more generous. The Senate version of the bill would allow businesses to expense 100% of their capital spent on asset purchases for the first five years. This provision would be phased out over the next four years by allowing the expensing of 80%, 60%, 40%, and 20% of capital spending.

This would bode well for IDMs (integrated design manufacturers) like Intel (INTC) and Micron Technology (MU), which have huge capital expenditures.

Territorial tax system

The Senate’s version also upholds the original proposal of implementing a territorial tax system under which companies are exempt from the home country’s tax on most or all of their overseas profits. Right now, the US follows a worldwide system, in which profits earned by US-based companies across the globe are taxable when that money is repatriated to the US.

It’s presumably for this reason that many US companies don’t repatriate their profits back to their home country.

A territorial tax system would likely reduce the tax burden on US companies and could make them more competitive with other countries’ companies that follow a territorial tax system. The Senate version of the bill also includes several anti-abuse provisions that would likely cover some loopholes in the tax system.

Repatriation tax

The agreed-upon tax bill also involves a one-time low tax rate on all assets held by US-based companies overseas, whether they repatriate it to the home country or not. The proposal had been to charge a one-time low tax rate of 14% on cash assets and 7% on non-cash assets. The Senate increased the repatriation tax rate by 50 basis points to 14.5% and 7.5%, respectively.

This is likely welcome news for semiconductor companies (SMH) that have global operations. Among semiconductor companies, Qualcomm (QCOM) has the highest cash reserves of $29 billion held overseas, which it is using to acquire Netherlands-based NXP Semiconductors (NXPI). These companies would likely benefit the most from the territorial tax system and the low repatriation tax.

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