Amendments to Article 10-2 and Article 72 in the Statute for Industrial Innovation, colloquially known as Taiwan’s version of the United States’ “CHIPS Act”, was approved by the Executive Yuan in mid-November. “This is part of the global strategy to defend Taiwan’s position as a semiconductor leader,” says Wang Mei-hua, Minister of the Ministry of Economic Affairs (MOEA). 

Wen-Tai Hsu (許文泰), Research Fellow at the Institute of Economics at Academia Sinica, has traditionally been against government handouts. But even he is eager to see the new rules in effect. “This is a moment of crisis;, we need to save TSMC!” 

This is because Hsu sees the advanced manufacturing processes of the semiconductor industry as an international competition in which the winner takes all. TSMC holds all the cards in terms of technological knowhow, but Intel may catch up thanks to subsidies from the U.S. government. What’s more, TSMC is a cornerstone of the Taiwanese economy, and its success can trickle down in the form of employment opportunities and taxes.

But some in the industry worry that the new law was designed solely for the benefit of TSMC. 

One Taiwanese IC design company CEO says that, while it’s good of the government to try to lend a helping hand, he hopes “the new law will not only take care of big companies and startups possessing new technology, but also the entire value chain as well.”

Not even TSMC may be eligible for benefits

A look at the fine print will show that the new rules are very restrictive. Applicants must match every one of a list of four criteria: one, they must occupy a key position in the global supply chain; two, R&D expenditure must reach a certain level; three, R&D expenditure must make up a certain percentage of their net revenue; and four, the effective tax rate must not drop below 12%. 

According to the Ministry of Finance’s (MOF) internal evaluation, fewer than 100 eligible companies meet all four of the criteria.

At a Glance: Amendments to the Statute for Industrial Innovation, aka Taiwan’s “CHIPS Act”

Eligibility: R&D expenditure must reach a certain scale. R&D expenditure must make up a certain percentage of net revenue. Effective tax rate: 12% in 2023, and in principle, 15% beginning in 2024. However, the Executive Yuan may approve the adjustment of the 2024 ratio to 12%, and subsequently to 15% from 2025 to 2029. Applicants must not have committed major violations of environmental protection, labor or food safety acts in the past three years.

Investment incentives: For investment in innovative R&D: Tax credits for up to 25% of investment costs in the current year, but not exceeding 30% of total applicable revenue tax For investment in equipment used in advanced manufacturing processes: If investment in new machines or equipment used in advanced manufacturing processes reaches a specified level, there will be tax credits for up to 5% of the purchase cost with no upper limit, but not exceeding 30% of total applicable revenue tax.

Note: Combined investment incentives in the same year may not exceed 50% of total applicable revenue tax. (SourceL PwC Taiwan)

The effective tax rate refers to the ratio between the company’s annual tax and its annual revenue. What’s different this time around is that the MOF has stipulated that for Taiwanese companies which manufacture overseas such as in Vietnam or China, any taxes they pay to foreign governments must be deducted before calculating the effective tax rate.

Currently, the proposed CHIPS Act says the effective tax rate for applicants must not drop below 12% in 2023; the bar will be raised to 15% from 2024 to 2029. In other words, enterprises must pay a certain amount of taxes before they are eligible to receive subsidies. 

As outside parties without access to the companies’ ledgers, any calculations must be made using publicly available information. By CommonWealth Magazine’s estimates, Taiwan’s top semiconductor companies, such as TSMC, MediaTek, UMC, and Realtek, all fall below the threshold. This is to say that there’s a chance none of them will be eligible for subsidies under the new law.

Why are Taiwan’s most competitive semiconductor leaders ineligible for the new subsidies? According to the MOF, TSMC has a low effective tax rate because it is currently still benefiting from other government-financed investment incentives. Once the new rules are in effect, “TSMC’s effective tax rate will go up.”

Some companies argue that the required effective tax rate is too high. However, this is in accordance with international standards. The OECD is attempting to establish an effective minimum global corporate tax rate of 15%, which will go into effect next year. International corporations with an effective tax rate that is lower than 15% will expose its subsidiaries to taxation from the countries in which they are operating.

In other words, if the MOF doesn’t put its foot down—“It’s opening up Taiwan’s treasury to foreign entities,” explains Professor Joe Chen (陳國樑) of National Chengchi University’s Department of Public Finance.

Even though there might not be many eligible enterprises, the tax credits that are being handed out are still nothing to sneeze at.

According to sources, once the new law is in place, companies will enjoy tax credits valued in the tens of billions. The exact number will be disclosed once the draft amendments are delivered to the Legislative Yuan. 

No upper limit to equipment-related incentives causes a major drain on taxes

According to Professor Chen, of all the proposed tax credits, the OBU (offshore banking unit) portion of the business income tax that is tax-exempt is likely to cause the biggest loss in tax revenue—to the tune of NT$19.5 billion in 2023. To put it bluntly, the CHIPS Act may end up being the greatest tax haven in the history of Taiwanese taxes.

“Our current estimate of tax losses doesn’t even take the subsidies into account. If these amendments go into effect, we’re looking at far greater losses,” warns Chen.

But Minister Wang stresses that there will not be any loss, because the value generated will outweigh any potential drawbacks. 

The billion-dollar question is this: If fewer than a hundred companies will be eligible, where are the losses coming from? What sort of floodgate will Article 10-2 open?

The key is the fact that “investment in equipment used in advanced manufacturing processes” will be incentivized. 

The truth of the matter is, it was only after a long and arduous journey that Taiwan abolished laws that incentivized investments. The new approach is to incentivize research and development.

Before the CHIPS Act, there were only two types of incentives remaining. One was to invest in R&D—this netted up to 15% in tax reductions. The other was to invest in smart manufacturing, 5G telecommunications, or equipment related to cybersecurity. This offered up to 5% in tax reductions. The tax reduction ceiling was capped at NT$1 billion.

While the amendments establish a strict set of rules for which companies are eligible for tax credits, they leave the door wide open in terms of what sort of behavior will be incentivized—not to mention the amount of tax credit that will be allowed.

Incentives for research and development soared from 15% to 25%. Incentivized equipment procurement will no longer be limited to R&D-related work, or to any specific field at all. And even though the upper limit of tax credits is capped at 5%, there will be no ceiling for the cost of purchase.

“Enterprises used to complain that moving production to Taiwan is difficult because they are not incentivized to purchase equipment. Now they have tax credits of up to 5%, which means production costs have decreased by the same amount,” says Chen.

Let’s do some math. If Company A sets up a factory in Taiwan in 2023 and spends NT$50 billion to purchase equipment for advanced manufacturing processes, and then kicks in another NT$5 billion for R&D, it should have to pay NT$10 billion in taxes.

Before the amendments, the expenditure in R&D would bring in NT$750 million’s worth of tax credits. Since the equipment the company procured matched the criteria for smart manufacturing and cybersecurity, it would also generate tax credits, which are limited by the NT$1 billion ceiling—so that’s another 70 million in tax credits. All in all, that’s about 800 million in tax reductions. 

After the new laws are in place, not only can Company A get NT$1.25 billion in tax credits for its investment in R&D, its incentives for purchasing equipment will jump from 50 million to 2.5 billion. That’s 3.75 billion overall in tax reductions—more than four times greater than before the CHIPS Act went into effect.

Do companies deserve even more tax breaks?

“TSMC already pays a pittance in taxes, and it makes a lot of money. It doesn’t need even more government handouts,” says Chen.

Korean media outlets have pointed out that between 2019 and 2021, the average business income tax for Taiwanese semiconductor companies was only 10.9%, which is half of what companies pay in Korea. When the MOEA cites incentive programs in the U.S., Japan, and Korea as support for its new policy, it omits the fact that business taxes in Taiwan are much lower than in these three countries.

Taiwan’s business tax was only raised from 17% to 20% four years ago. In America, it is 21%, but that is before state taxes. Both Japan and Korea have their versions of national and local taxes; all told, the tax of doing business in those countries is close to 30%.

Despite all of this, Taiwanese businesses not only enjoy lower tax rates, but they also benefit from a never-ending parade of benefits and incentives—some of which have been extended, even though prior legislation required them to be eventually phased out.

“We’ve been conned by the MOEA for 20 years!” one official with the MOF laughs ruefully. “Back when we abolished the incentives amendments, the hope was that such benefits would fade into history. Article 10 in the Statute for Industrial Innovation was supposed to be all that was needed to keep the country’s economy afloat. Then the MOEA came up with Article 10-1, and now we have Article 10-2 in the works.”

The next battle will be fought at the Legislative Yuan. An official with the MOEA reveals that not only are most legislators on board, some are even inclined to sweeten the deal. “From the standpoint of the MOEA, the bigger the incentives, the better.”

Can the Ministry of Finance stand up to the Ministry of Economics Affairs? If history is anything to judge by, the answer is a pessimistic “no”. 

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Have you read?

• Supply Chain 3.0: the US ambition of Taiwan businesses 
• Taiwan's Hon Hai and EOI invigorate America's Rust Belt 
• TSMC alone cannot rebuild the US semiconductor supply chain - Taiwanese Hidden Champions need to follow

Translated by Jack Chou
Edited by TC Lin
Uploaded by Ian Huang