US, China Resolve Semiconductor Tax Spat
California, US manufacturers set to take advantage of the value-added tax repeal
WASHINGTON, DC - 07/13/04 - The US and China have agreed on a resolution to their dispute at the World Trade Organization (WTO) regarding China's tax refund policy for integrated circuits.
The resolution "will ensure full market access and national treatment for US integrated circuits in China, the world's fastest growing semiconductor market and an export market worth over $2 billion to American manufacturers and workers," said the Office of the US Trade Representative (USTR).
The agreement resolves the first WTO case filed against China by any World Trade Organization?member country.
Effective immediately, China will not certify any new semiconductor products or manufacturers for eligibility for VAT refunds, will no longer offer VAT (Value-Added Tax) refunds that favor semiconductors designed in China, and, by April 1 of next year, stop providing VAT refunds on Chinese-produced semiconductors to current beneficiaries.
Under China's tax policy, US exporters of integrated circuits to China paid up to five times as much tax as local Chinese manufacturers. These policies, Washington said, "disadvantaged US manufacturers as well as US firms that design integrated circuits."
China is the world's third largest consumer of integrated circuits, with a market value of approximately $19 billion. Although imports currently represent approximately 80% of China's market, its semiconductor industry is expanding rapidly, with substantial investment from foreign firms.
China's VAT refund policy, Washington said, "not only discriminated against US products directly, but also has distorted international investment in the integrated circuit sector."
The country is a substantial market for semiconductors produced in US factories as US exports of integrated circuits to China were $2.02 billion in 2003.
The agreement, once implemented, will resolve the case that the US initiated at the WTO last March and "is the culmination of several rounds of discussions between negotiators and legal experts from the two countries," said the USTR.
The ramifications for California are significant as the state is home to almost half of the 1,300-plus companies in the US engaged in semiconductor development and manufacture with more than 75,000 workers generating for roughly $30 billion in revenue annually.
The US and China held formal consultations in Geneva - which included delegations from third parties Japan, the European Communities, and Mexico - as well as several meetings in Washington and Beijing.
US exports of integrated circuits to China are subject to a 17% VAT.
However, the country has taxed domestic products significantly less, by allowing firms producing integrated circuits in China to obtain a partial refund of the tax.
As a result of the refund policy, the effective VAT rate on domestic products can be as low as 3%. China also has allowed for a partial refund of VAT paid on integrated circuits designed in the country but manufactured elsewhere.
An integrated circuit or semiconductor is an electronic device that can be switched to conduct or block electric currents.
Most semiconductor devices are made from silicon, although other materials, such as gallium arsenide, can also be used. Virtually all electronics used today - from anti-lock brakes in automobiles to satellite systems and computer applications - incorporate semiconductors.
If consultations had not resolved the dispute, the US would have had the right to request that a WTO dispute settlement panel be established to consider the issue, the USTR said.
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