China Mulls New Tax Incentives For Chip Makers

by Mary Swire, Tax-News.com, Hong Kong

20 July 2006

The Chinese government is reportedly considering offering new tax breaks to manufacturers of microchips in order to aid the development of its high-tech manufacturing sector.

The China Securities Journal reported on Wednesday that foreign-backed chip makers would benefit from tax-free status for a period of five years, following which they would pay half of the normal tax rate for an additional five years.

Also, qualifying enterprises could receive research & development credits and tax exemptions on fixed investments.

The rules could be introduced by the end of the year, according to the journal.

Many major semiconductor manufacturers have set up operations in China, such as Intel, AMD and South Korea's Hynix.

In the past, tax breaks granted to China's semiconductor industry have been the subject of global controversy. Last year, China was forced to abolish a system of VAT rebates favouring domestic manufacturers after the United States had complained to the World Trade Organisation that they were in breach of international trade rules.

Under the disputed regime, China imposed a VAT rate of 17% on sales of all imported and domestically produced semiconductors, but rebated the amount of the VAT burden in excess of 3% for semiconductors produced in China.

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