Taiwan’s Version of “CHIPS Act” Provides 25% Tax Credit for Major Semiconductor Companies to Pursue R&D and 5% Tax Credit for Investments in Advanced Manufacturing Equipment

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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.