The government of Taiwan is preparing to launch its version of “the CHIPS Act” to support locally operating companies that develop innovative technologies and have a crucial spot within the global supply chain. A highlight of this legislation is a tax credit scheme: a maximum of 25% for R&D in “forward-looking technologies” and another 5% for investments in advanced manufacturing equipment.

According to the draft of this proposed legislation, companies that play an important role in the global supply chain and engage in technological innovation within the jurisdiction of Taiwan (the Republic of China) are eligible for the aforementioned tax credits if they also meet certain other conditions. As for the limit of the two tax credits, neither one of them can exceed 30% of the business income tax for the current year. Together, they cannot exceed 50% of the same annual business income tax.

Companies that will be applying for the tax credits must meet three general conditions. First, applicants must pay an effective tax rate of at least 15% in accordance with OECD’s minimum tax rules for multinationals. Second, applicants must reach a certain scale for the ratio of R&D spending to revenue (R&D intensity) and equipment-related investments. The minimum thresholds for the R&D intensity and equipment-related investments have yet to be determined and will likely be set within the subsections of the legislation later on. Lastly, applicants must not have incurred a major regulatory violation concerning environmental protection, labor protection, food and drug safety, etc. in the past three years.

Taiwan’s Ministry of Economic Affairs stated in a recent announcement that the island’s industries are deeply enmeshed within the global supply chain. They thus have become the backbone of the global economy and international commerce on account of their “uniqueness” and “irreplaceability”. The ministry added that local industries will have to adapt to the changing landscape of cooperation and competition in order to retain their indispensable role.

The ministry also commented that in the wake of a series of major events that have disrupted the operation of the global supply chain, many countries have initiated industry development policies that seek to improve the resiliency of their key economic sectors and strengthen their national security. These policies tend to emphasize the followings: (1) the formation of an autonomous and stable domestic supply chain; (2) the need to achieve dominance in next-generation technologies; and (3) the provisioning of large subsidies and tax incentives so as to raise domestic production and attract investments from multinationals. The ministry further asserted that as international competition gets fiercer, Taiwan must retain its existing advantages while finding other ways to further consolidate and enhance the positions of its key industries in the global supply chain. Therefore, the government finds it necessary to provide new tax incentives to support this kind of development.

According to TrendForce, as the United States continues to expand the content of various lists, successively pass anti-China bills, and explicitly prohibit the export of certain products to China, the two countries have gradually drifted apart and this antagonistic relationship will continue if no drastic changes occur between the two parties in the next 6-8 years.

In the face of U.S. encroachment, all sectors in China must continue to look for escape routes if the country wishes to tear down the many walls built by the U.S. and move towards industrial autonomy. China’s top priority is to make breakthroughs in the semiconductor field. As far as current development is concerned, there are still many companies in China’s domestic IC design industry moving towards advanced manufacturing processes even after leading manufacturers such as Huawei, Changsha Jingjia Microelectronics, and Goke Microelectronics were placed on the entity list. At the same time, semiconductor manufacturers such as SMIC, CXMT, and Yangtze Memory Technologies have repeatedly developed advanced process technologies while Hua Hong Group has gradually expanded in the field of mature processes. If this trend continues, it will not be difficult for China to realize semiconductor autonomy in processes above 10nm.

If U.S. effectively enforces EDA ban and does not expand controls, impact on China will emerge in 2025

The U.S. Department of Commerce’s export restrictions on Chinese manufacturers are escalating but the autonomy of China’s domestic semiconductor industry is also gradually increasing. As the confrontation between the United States and China intensifies, the United States has launched a new wave of export control measures. On August 12, 2022, the U.S. Department of Commerce announced that it will restrict the export to China of EDA software required to design integrated circuits with GAAFET structure. Since GAAFET is a structure that is used in processes below 3nm, this move is equivalent to setting an advanced threshold for China’s semiconductor development.

Domestic Chinese IC designers who are committed to the development of SoCs, cloud computing chips, and GPUs are destined to move to more advanced manufacturing processes in order to meet the iterative needs of product upgrades and are expected to move toward the 4nm manufacturing process in the next 2 to 4 years. If the U.S. effectively implements the EDA software ban and does not expand the scope of EDA software restrictions, the impact of the ban on China’s semiconductor industry is expected to gradually emerge in 2025, not only delaying the development schedule of some domestic Chinese IC designers but even causing developmental stagnation.

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