Taxation and the semiconductor industry
The semiconductor industry is a capital-intensive industry that spends a large amount of revenue on R&D (research and development) and capital expenditure.
The industry has a global supply chain, with key operations located in the United States, China, South Korea, Taiwan, and Japan.
US-based semiconductor companies have rich IP (intellectual property), but they depend on South Korea and Taiwan for the manufacturing of chips, on Japan for packaging and testing, and on China for chip sales.
The 35% corporate tax charged by the United States didn’t change with the change in the business environment. This tax reduced US-based companies’ competitiveness and discouraged their repatriating cash earned overseas back to the United States.
Moreover, this tax has encouraged corporate inversion, wherein some companies have created their tax residences in low-tax countries such as Ireland. This scenario will likely change when Donald Trump takes US presidential office in January 2017.
Trump’s proposed repatriation tax policy
The 35% tax rate has discouraged many technology companies from repatriating their overseas cash reserves to the United States. As a result, they’ve found uses for this cash overseas. Qualcomm (QCOM) used its $30 billion overseas cash to fund its acquisition of Netherlands-based NXP Semiconductors (NXPI). Apple (AAPL) borrowed money to pay a dividend and buy back shares instead of using its overseas cash.
Trump plans to levy a 10% repatriation tax on the accumulated profits of US companies’ foreign subsidiaries from the day of the proposal’s taking effect. This tax would be payable over a period of ten years, and it would benefit companies such as Linear Technology (LLTC) and NVIDIA (NVDA), which have significant amounts of offshore cash.
Moreover, US companies’ foreign subsidiaries would pay taxes each year on their profits, discarding the current law that deferred the taxes on these offshore profits until they’re repatriated. In this way, the US government would discourage companies’ accumulating cash overseas.
However, this policy would also bring several challenges. We’ll look into these challenges in the next part of the series.