SIA ISSUE BACKGROUNDERS

Tax Policies to Promote Research and Investment

Issue:To promote increased productivity and long term growth, the SIA supports tax policies that encourage investments in research and manufacturing in the U.S.  While the tax bill passed last year included a number of provisions that strengthen America’s competitive position, U.S. industry continues to be pressed by overseas competitors who enjoy more favorable tax policy creating a continued challenge for U.S. policy makers.

Importance: Investment in high technology goods and services will help spur growth throughout the economy. America's future economic growth depends not only on its ability to utilize information technology, but also on its role as a manufacturer of the high tech products that drive the information age. The U.S. represented over 30 percent of the world semiconductor market in 2000, but less than 20 percent today, a troubling reflection of the movement of electronics assembly (i.e. semiconductor consumption) offshore. While there are a number of factors that determine the location of production facilities; including relative labor costs and proximity to markets; government policy - both foreign and domestic - also influence investment flows. The U.S. can take a number of steps to improve the competitive position of the high technology sector in both the short and long term.

SIA Position/Action:

• R&D Tax Credit -- The R&D credit promotes research in the U.S.  The credit was first passed in 1981, and has been extended 12 times since. The credit is currently scheduled to expire at the end of 2007.  To provide predictability in research planning, the Congress should make the R&D tax credit permanent.  Similarly, increasing the credit rates would make the U.S. more competitive with its trading partners.  Even with the recently passed credit enhancements, the value of the credit is mid-single digits for most companies (e.g. the Alternative Incremental Credit provides a maximum 5 percent credit.)   In contrast, Canada offers a permanent, flat 20 percent credit and has placed advertisements in U.S. business journals encouraging U.S. firms to move their research to north of the border.  France has a 50% R&D credit that includes a 10% flat credit and a 40% credit for R&D expenditures in excess of average R&D spending over the two previous years.  Japan has a flat 10% research credit.  China offers foreign investment enterprises a 150% deduction for R&D expenditures, provided that R&D spending has increased by 10% from the prior year.   Mexico has a 30 percent tax credit for all R&D expenses, including research equipment that is not eligible for the credit in the U.S.  Enhancements to the R&D credit should also be considered.
  
  
• Depreciation/Expensing -- Accelerated depreciation or expensing of high technology equipment would have a particularly positive investment impact. Many of our economic competitors - who actively seek to lure investment in semiconductor manufacturing overseas - offer far more favorable tax treatment than that offered in the United States. As part of the discussion of fundamental reforms of the tax code to promote investment and manufacturing in the U.S., the Congress should consider allowing companies to expense high technology equipment.
  
  
• Rate Reductions -- Tax differences are the major reason behind a $1 billion 10-year cost difference between building and operating a fab in Asia versus the U.S.  As result of recent reductions in Europe, U.S. corporate tax rates also now exceed most European nations.  SIA is encouraged by the FSC/ETI resolution that will effectively reduce the rate for domestic production to 31.85 percent in 2010.  However with substantially lower rates or tax holidays overseas, Congress must continue to consider further significant rate reductions if manufacturing is to remain in the U.S.
  
  
• International Tax Reform -- SIA supports a rethinking of international taxation rules as current rules discourage companies from repatriating their foreign source earnings. The U.S. should consider alternatives to its current rules on taxing foreign source income. Many of the companies that compete against the U.S. operate under territorial tax systems, or otherwise more favorably treat foreign income. The move toward contract manufacturing, a result of the escalating cost of chip factories, puts an additional burden on U.S. companies because their offshore income may be treated under Subpart F rather than as deferred income.