Why Trump’s Proposed Tax Policy Could Benefit The U.S. Semiconductor Industry

Corporate tax reform was one of the major agendas of President Trump’s election campaign. The proposed changes include a significant cut in the current corporate tax rate of 35%, which is among the highest in the world, and lowering the repatriation taxes on cash U.S. companies have stashed outside the country, from the current 35% to a special one-time rate of 10% payable over a period of 10 years. If the policy does come into place then it could have a positive impact on the semiconductor sector, as most semiconductor companies derive a significant majority of their revenue from outside the U.S. and have stashed away billions of dollars in earnings abroad to avoid paying taxes in the U.S.

The semiconductor industry is highly capital intensive and spends a large chunk of revenue on R&D and capital expenditure. The industries’ supply chain is spread across the globe. While the U.S. based companies are rich in intellectual property, manufacturing of chips is concentrated in South Korea and Taiwan, and packaging and testing in Japan. China accounts for a majority of the global chip sales.

• China’s share in global semiconductor consumption: 58.5%
• South Korea & Taiwan’s share of global wafer capacity: 42.2%

Given the unfavorable tax rate in the U.S. (35%) compared to most of the above mentioned economies, the U.S. semiconductor companies keep most of their cash outside the U.S., which is then often reinvested in their foreign subsidiaries or in some cases used for acquisitions. For example, Qualcomm (NYSE:QCOM) used its overseas cash to fund its acquisition of Netherlands-based NXP Semiconductors, in 2016.

The high tax rate puts U.S. companies at a disadvantage compared to their foreign counterparts. Other countries provide lower corporate tax rates, more robust incentives for R&D, modern international tax systems that do not subject business activities outside their borders to taxation, and other beneficial tax provisions. ^[1] A favorable U.S. tax code can thus help increase the competitiveness of U.S. semiconductor companies, which has been facing increasing threat from China as the country looks to reduce its dependence on the global semiconductor industry by becoming self sufficient in semiconductor manufacturing.

Within the semiconductor segment in the U.S., Qualcomm, Intel (NASDAQ:INTC), Nvidia (NASDAQ:NVDA), and Applied Materials (NYSE:AMAT) stand to gain the most as they have a huge proportion of their cash and cash equivalents outside the U.S. How much of their foreign cash reserves these company end up repatriating (if the tax proposal is cleared) and whether the same is used to boost R&D investment and/ or share buybacks and dividends, is yet to be seen.

Under the George W. Bush presidency, the repatriation tax was temporarily cut to 5.25% in 2004, which prompted companies to bring back $312 billion back to the U.S. ^[2] However, most of this was used for share buybacks and paying dividends, thus not really having a material impact on domestic investment and employment generation.

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1. SIA Blog, Feb 2, 2017 [↩]
2. How Apple & Google Would Win Big From a Trump Cash Tax Break, Fortune, November 9, 2016 [↩]