How Tax Reform Could Impact Semiconductor Companies

There could be a favorable business environment for the US semiconductor industry in 2018 in the wake of tax reform at the end of 2017. President Trump signed the Tax Cuts and Jobs Act into law on December 22, 2017. It brings significant changes to the US Tax Code for the first time in 30 years.

The act could make US companies more competitive with their overseas counterparts and especially help the US semiconductor industry sustain its leadership in research, design, and manufacturing. The biggest and most anticipated reform is the reduction of the corporate tax rate from 35% to 21%.

The Tax Cuts and Jobs Act includes a one-time tax on all assets held by US-based companies overseas, whether they repatriate it to the United States or not. Cash reserves held overseas will be charged a 15.5% tax, and non-cash assets such as factories and equipment will be charged an 8% tax. Companies can spread the taxes payable over eight years.

US semiconductor companies Qualcomm (QCOM), Intel (INTC), and Nvidia (NVDA) have large overseas cash reserves. This repatriation tax could reduce their deferred tax liabilities calculated at a 35% tax rate and encourage them to repatriate the cash to the United States.

The previous attempts to bring overseas cash back to the United States saw companies spending the cash to buy back shares and pay dividends. To encourage companies to invest the repatriated cash in the country, the tax bill is allowing companies to expense their capital expenditure. That incentive could bring more capital into the real economy and create jobs to support economic growth.

The tax bill also adds anti-base erosion and anti-abuse tax to discourage US companies from shifting profits to lower-tax countries.

The provision of expensing qualified capital expenditure could bode well for companies such as Intel and Micron Technology (MU), which annually spend $10 billion and $5 billion, respectively, on upgrading their fabrication facilities. There’s a probability that semiconductor companies could increase their capital expenditure in 2018.

It would also bode well for semiconductor equipment manufacturers such as Applied Materials (AMAT) and KLA-Tencor (KLAC).

Next, we’ll look at some of the other reforms in the Tax Cuts and Jobs Act such as the introduction of the territorial tax system and the elimination of the alternative minimum tax and its impact on semiconductor companies.