On July 28, Congress passed a bill to increase production at US semiconductor companies with $52 billion in tax credits and other incentives.
In-house teams claim to be simulating potential outcomes under the most recent R&D tax credit for advanced semiconductor manufacturing processes supported by Congress, which was approved on Thursday, July 28, and will be signed into law by President Joe Biden this week.
The Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act, which provides $52 billion in financing options, is significant because a number of technology companies are awaiting the final legal text before making critical business decisions in the midst of a global chip shortage.
For instance, Samsung intends to use the financing provided by the bill to construct a $17 billion chip factory in Texas. To build a $20 billion factory in Ohio, Intel is also awaiting the last-minute specifics on the advanced investment R&D tax credits.
Tax credits and other financing options could begin on January 1st 2023 once the law is finalized, which could happen as early as mid-August.
According to an in-house lawyer at Intel in California, "the CHIPS Act is a critical step to support the entire US semiconductor industry and to help ensure American leadership in semiconductor manufacturing and R&D."
"The Congress has done its part, and now we are going to do ours," he continues. "We have already modelled the tax outcomes under the act, and we will move full speed to start building in Ohio."
The bill includes a Section 107 manufacturing tax credit of 25% for qualified investments made in an advanced semiconductor manufacturing facility during a given tax year. Over a ten-year period, this provision is projected to cost $24 billion. After December 31, qualifying property can still use the temporary credit.
Manufacturing of semiconductors and the specialized machinery needed to make computer chips are examples of investments that are eligible. The US government has made the largest direct investment to date in this sector.
The chip manufacturer AMD in California's Crystal Chen, director of international tax, asserts that the industry sees these incentives as essential to maintaining growth.
When pressure on lawmakers increased in June as a result of Intel and other manufacturers, including GlobalWafers, a Taiwanese semiconductor company, publicly stating that plans to build locally in the US depended on the CHIPS Act, the significance of the legislation became evident.
Since consumer demand changed as a result of the COVID-19 pandemic and recent concerns about global inflation, computer chips have been in short supply everywhere. But even as China and other countries compete with the US to make significant investments in the sector, global chip production has decreased since 2010.
The Taiwan Semiconductor Manufacturing Company, Micron Technology, and Applied Materials are additional businesses that intend to use the CHIPS Act's funding for US investments.
The Build Back Better (BBB) Act, a larger spending package that includes the notable corporate alternative minimum tax (CAMT) proposal, aligns with the proposals in the CHIPS Act.
One option for refunding R&D tax credits, which was included in many of the BBB Act's tax credit proposals, is choosing direct pay with the US tax authority, the IRS. The idea is intended for taxpayers who must use tax equity financing to complete manufacturing projects because they do not have enough tax liability to qualify for the credits.
However, historically most businesses have not relied on trading new tax credits that are not widely recognized in the market for access to cash. Taxpayers support direct pay for access to tax equity financing. The market might take some time to accept new R&D tax credits as a component of a financing plan.
"It is unclear how effective refunding these new credits will be because there are lingering uncertainties over how the IRS will treat them in the long term, as they are temporary incentives," according to Chen.
As a result, the IRS would probably need to issue a lot of guidance in order to implement the direct pay provision. Taxpayers will probably pay close attention to the guidance and implementation process to see if it could serve as a model for more refundable business credits.
Contrary to the BBB Act, the CHIPS Act forbids chip manufacturers from expanding their operations in China and Russia even if they accept the available financing under direct pay. This regulation aims to limit the production of advanced chips in countries where the US might have national security concerns.
"The semiconductor industry and other businesses that rely on the industry’s products will want to closely analyse the new tax incentives offered and their limitations," according to Chen.
The CHIPS Act includes a tax credit for advanced manufacturing R&D for semiconductor manufacturers, but it leaves in place the current regulations that make it challenging for large businesses to use the credit.
For instance, the CHIPS Act does not contain any provisions to reduce the costs of R&D activities that are categorized as corporate research expenses under Internal Revenue Code Section 174.
Shelby Ford, head of the R&D tax credit practice at the Kentucky-based Crowe tax advisory firm, claims that the IRS adheres to rules that could jeopardize the new R&D credit is ability to offset research expenses.
According to Ford, "the benefits of the semiconductor R&D tax credit may seem obvious to any taxpayer that already has some level of spending that qualifies for a deduction, but it could be hard to prove a qualified expenditure and its purpose."
"Taxpayers will have to implement a record-keeping strategy that will allow them to capitalise on additional bottom line opportunities with the credit," she continues.
The IRS has already stated that it is looking for more in-depth reports from large businesses about all the expenses that their R&D credits will deduct in subsequent years, according to a memo released by the IRS in September 2021. The taxpayer is required to list every research activity that was carried out, who carried it out, and why for each business investment project.
If forthcoming legislative guidance makes it easier to qualify for the tax credit and other financing options become available, the CHIPS Act will have a greater impact on business decisions in the coming weeks.
Politicians and taxpaying citizens claim that the law's other drawback is that it exacerbates economic inequality by giving the semiconductors sector preferential treatment over other sectors.
Following the developments in the US, Leonard Wagenaar, a partner in EY's London office's international transactions tax practice, concurs that the policy package only benefits one industry.
"Several colleagues argued for permanent COVID-era full expensing rules instead of the US support package for semiconductors” because it would have been a fairer economic policy to boost the wider manufacturing sector in the US," says Wagenaar.
Full expensing enables immediate full investment deduction, which would address some limitation issues with the current R&D tax credit system. During the COVID-19 pandemic, some nations implemented full expensing policies, and even the US has some manufacturing-specific full expensing regulations.
The BBB Act's CAMT, which could further restrict the use of R&D tax credits to reduce tax costs due to the minimum rate that must be maintained at 15%, is the last potential obstacle to the legislation.
The benefits of full expensing from the COVID era for the manufacturing sector could also be undone by the CAMT. According to an OECD impact assessment, it is one of the main reasons why manufacturing is the sector most negatively impacted by minimum taxation.
"The tax credits for advanced manufacturing and other incentives are likely to be cancelled out at least in part by the CAMT," according to Wagenaar.
Although the CHIPS Act and the application of its advanced manufacturing R&D tax credit have some drawbacks, many taxpayers are already projecting August results to determine whether to invest domestically or abroad.
Regardless of the specific results for semiconductor companies, every internal team in the larger manufacturing industry should take into account the CHIPS Act's R&D tax incentives.
By fLEXI tEAM