Agreement ends rebates for chip makers
By Liu Baijia (China Daily)
Updated: 2004-07-09 23:51

An agreement between China and the United States to eliminate Chinese chip makers and designer's value-added tax (VAT) rebates will not stop the country's push to develop a domestic semiconductor industry or reduce its attractiveness to global investors, say companies and analysts.

The Ministry of Commerce said on Friday that the two sides reached a preliminary understanding at the start of the month which will solve the first trade dispute filed by the US against China before the World Trade Organization (WTO).

The formal memorandum of understanding will be signed at a later date.

The ministry says from April, China will adjust its VAT rebate policy for domestic semiconductor companies and stop giving preferences to existing companies, while the United States has agreed to withdraw its WTO complaint.

The United States had alleged that China collected 17 per cent VAT on imported semiconductor products, while the rate for domestic companies was only 3 per cent.

Despite reaching an agreement, the ministry continues to refute the claim, saying it was "incorrect and not based on reality," as some people were confusing the concepts of tax rate and tax burden.

Yang Xueming, a senior consultant to the China Centre for the Information Industry Development, a government think-tank, backed up the ministry.

He said tax burden refers to the result of actual VAT divided by the total sales of a company, but the actual tax burden of most domestic and foreign semiconductor companies was below 3 per cent, so only a few domestic businesses were eligible to receive the preferential policy.

Yang said he also believed that the elimination of VAT rebates would not create much of a difference for domestic companies.

"This is just a strategic adjustment of China's encouraging policies for the semiconductor industry," he said.

Yang said China could still use other measures to support the core of the high-tech industry, which were in agreement with WTO principles, such as the establishment of industrial funds.

Dorothy Lai, the chief semiconductor analyst for the US-based market research house Gartner Inc's Asia Pacific operation, says the agreement will not create a significant fallout.

She said the main beneficiaries of the elimination of the VAT rebates could be some US companies, which manufacture in the US but sell their products in China. But there are few such companies and they only have a small volume of exports.

Conversely, some US semiconductor makers such as wireless chip company Broadcom, which outsources its production to foundries in China, may even see their costs rise and their competitiveness decline, as the costs of their local manufacturing partners rise and they have to pass the impact on to consumers.

Semiconductor Manufacturing International Corp, the biggest semiconductor maker in China, told China Daily that the elimination of the VAT rebate would not materially impact on its financial performance and its ability to compete in the global semiconductor market.

Lai said the huge market potential of China would remain the biggest factor for foreign investors, even when the VAT rebate policy is lifted.

As more electronics companies come to China and the competition intensifies, they will have to ask semiconductor makers to invest in China to cut their costs, Yang said.

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