Trade Group Chides Chinese VAT on Chips

Facing a possible shut out from the burgeoning Chinese semiconductor market, one industry trade group is arguing for the repeal of the company’s Value-Added Tax (VAT) rebate scheme.

The report filed Wednesday by the Semiconductor Industry Association (SIA) characterized the practice of charging more for non-Chinese products as “discriminatory” and said it “distorts trade investments and imposes a cost penalty for semiconductor importers trying to compete for sales in China.”

The study, “China’s Emerging Semiconductor Industry — The Impact of China’s Preferential Value-Added Tax on Current Investment Trends”, also outlines other factors contributing to the growth of China’s semiconductor industry. For example, the Chinese government provides income tax holidays for factories located in China, tax incentives for individuals, and manpower and education programs. With the exception of the VAT, the study does not criticize industrial promotional efforts by China as a general matter.

“The SIA supports open markets for all semiconductor products thus providing the consumer access to the best technology and the most competitive pricing from semiconductor companies throughout the world,” SIA president, George Scalise said in a statement. “The SIA has discussed this matter on several occasions with the U.S. Government, and the Chinese Government and industry. We will continue to raise this issue and we’re hopeful it can be resolved quickly and amicably.”

The San Jose, Calif.-based group said it also supports the U.S. Government bilateral efforts with China to eliminate the discrimination against imported semiconductor devices created by the implementation of its VAT.

The stakes are very high. China is currently the world’s most rapidly growing market for semiconductors and ranks as the world’s third largest market, with $19 billion in sales. Compared with other regions, China continues to keep the Asian Pacific marketplace at the top of the sales list. In the month of August, sales in the Asia Pacific were up 6.4 percent, Europe up 3.8 percent, Japan rose 1.6 percent, and the Americas increased 2.5 percent over July’s survey, which is tabulated by the World Semiconductor Trade Statistics (WSTS) organization, representing approximately 66 companies.

Currently China provides for VAT rebates on semiconductor products manufactured and sold within the country while continuing to charge the full VAT on imported semiconductor products. China applies a VAT of 17 percent on sales of imported and domestically-produced semiconductors. However, in June of 2000, China’s State Council announced that all integrated circuits manufactured in China would receive a rebate of the VAT in excess of 6 percent of the company’s tax burden. The policy was amended in September 2001, with an announcement that integrated circuits both designed and built in China would be eligible for rebate of the VAT in excess of 3 percent. The VAT rebates must be applied to research and development or capital expenditures within China.

A Chinese VAT, said Scalise, unfairly puts pressure on foreign semiconductor makers to design and manufacture their products within China, or face a cost penalty. The SIA backed up its argument saying the WTO does not allow countries to eliminate tariffs on the one hand, and arbitrarily impose a tax applied disproportionately on the other.

“GATT Article III on National Treatment prohibits a WTO member country from engaging in activity that treats domestic producers and products more favorably than imported products,” said Scalise.

If the Chinese continue to stonewall the rest of the world with its VAT on chip sales, the SIA says it could throw a huge monkey wrench into the overall IT machine. In June, the World Semiconductor Trade Statistics organization and SIA released its midyear 2003-2006 forecast, projecting a growth rate of 9.8 percent in 2003. The trade group also estimates worldwide sales of semiconductors to grow from $141 billion in 2002 to $205 billion in 2006. The majority of that growth, according to the SIA, will be fueled by chip sales.

The SIA says there may be a good chance at removing VAT based on past successes in the chip industry. In the 1980s, the U.S. eliminated semiconductor tariffs when faced with fierce competition with Japan, which resulted in lower costs for U.S. consumers and a larger market for the US semiconductor industry. The SIA maintains that China can best develop its economy and abide by international trade rules by equally lowering the VAT for both imports as well as domestically produced semiconductors.

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