It appears that the tax breaks offered by the Act for Industrial Innovation (產業創新條例), or the so-called “chip act,” to reinvigorate the nation’s strategic industries will have little effect, as only a tiny minority of local firms can meet the strict requirements set by the legislation.
The Ministry of Economic Affairs yesterday said that to be eligible for the tax breaks, a company should invest at least NT$10 billion (US$325.31 million) in new, advanced manufacturing equipment every year. The move apparently aims to ease the Ministry of Finance’s concerns over a possible decline in tax revenue.
Applicants are also required to allocate at least NT$6 billion to research and development (R&D). The figure is lower than the originally planned NT$10 billion, but is still double the NT$3 billion average R&D spending among the nation’s top 100 companies.
The incentives are not limited to the semiconductor sector: Companies in the 5G and electric vehicle industries, as well as those that make equipment for low Earth orbit satellites, are also covered.
However, only a few companies can afford such heavy spending, and most electric vehicle and satellite companies are start-ups with limited resources.
The legislature amended the act in January, raising the tax breaks from 15 percent to 25 percent of companies’ R&D spending and implementing a 5 percent tax credit for equipment spending, but only for advanced process technology.
However, the amendments say that the amount of R&D spending must account for at least 6 percent of a company’s annual revenue, which is a high threshold, as most local manufacturers spend an average of 3 percent of their revenue on R&D per year.
On top of that, a company must pay corporate income tax of 12 percent this year to be eligible, meaning only profitable companies can benefit from the tax breaks.
The incentives aim to safeguard Taiwanese chipmakers’ global leadership position, as countries rush to boost semiconductor capacity amid growing concern about supply resilience and escalating geopolitical tensions, the Ministry of Economic Affairs said.
When the incentives were first proposed last year, there were concerns that they would only benefit large chipmakers, such as Taiwan Semiconductor Manufacturing Co (TSMC), while medium-sized firms would be left behind.
TSMC is among only a handful of local companies that can afford such heavy equipment and R&D investment. It spent NT$7.5 billion on R&D in 2021, making up 8.76 percent of the company’s total revenue that year.
United Microelectronics Co plans to invest US$3 billion in new equipment and facilities this year, well above the NT$10 billion requirement.
However, the company usually allocates about 5 to 8 percent of its annual revenue to R&D spending, so whether it can pass the threshold for the tax breaks remains unclear.
Nanya Technology Co, the nation’s biggest DRAM chipmaker, last year met the requirements by spending NT$7.84 billion on R&D, or 13.77 percent of its overall revenue. It also invested NT$20.7 billion in new equipment and facilities. This year, it plans to allocate NT$18.5 billion to capital spending.
However, it remains unclear whether the memorychip maker can return to the black this year and qualify for the tax benefits.
If even the nation’s second-largest contract chipmaker and biggest DRAM chipmaker cannot be 100 percent sure that they can qualify for the tax breaks, it would be difficult for the policy’s benefits to spread to the whole supply chain.
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