The CHIPS Act restricts funding recipients from increasing semiconductor manufacturing operations in China and other countries that have been designated as national security threats according to US law. These limitations would be applicable to any new semiconductor manufacturing facility, with the exception of a facility that primarily produces outdated semiconductors for that country's market.
South Korean chipmakers such as Samsung Electronics and SK hynix currently operate chip factories in China and they are de facto facing a grave threat of losing a huge market -- The U.S. semiconductor market, estimated to reach about $61.5 billion in 2023, and the Chinese market, projected to reach about $89.9 billion -- or lose both of the world's largest chip markets if they do not choose a side. When big companies receive heavy damage, affiliated small and medium-sized enterprises (SMEs) are more heavily affected.
According to lawmakers on March 8, the Democratic Party is considering raising the tax deduction rates for semiconductor facility investments to 20% for large companies, 25% for mid-sized companies, and up to 30% for small and medium-sized enterprises. Additionally, they are considering a 10% additional deduction for investment increases (compared to the average of the previous three years), which could result in a maximum tax deduction of 40% for small and medium-sized enterprises.
This plan is more substantial than the proposal submitted by the Ministry of Economy and Finance to the National Assembly's Strategy and Finance Committee to increase the deduction rate to 15% for large companies and 25% for small and medium-sized enterprises.
The decision is said to reflect the strong intentions of the Democratic Party's leader, Lee Jae-myung, who has shown a sympathetic attitude toward supporting the domestic semiconductor industry following the introduction of the CHIPS Act in the U.S. The Act requires semiconductor companies that receive U.S. subsidies to return excess profits and prohibits investment in China for ten years.
The plan for tax deductions for semiconductor facility investments proposed by the Democratic Party is expected to be discussed at the National Assembly's Strategy and Finance Committee's tax subcommittee meeting on March 16. The committee plans to finalize the details of the amendment to the Special Taxation Law and process the bill by March.
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