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China to provide subsidies, tax breaks for chip firms

China plans to provide funding and widen income-tax breaks for semiconductor companies, even as it stopped a concession this month which US chipmakers said put them at a disadvantage.

China's government, which scrapped a rebate on value-added tax on April 1, said it may provide funding for up to half of the cost of a chipmaker's research and development project. At the same time, some chipmakers may be exempted from paying income tax for as long as 10 years, an industry official said.

The latest moves come after China's government in July bowed to pressure from the US and agreed to end rebates of the value-added tax. The decision came after the US filed the first complaint against China at the World Trade Organization. Groups representing US companies such as Intel Corp and Micron Technology Inc argued the rebates curbed their exports to China.

"The research funding and income tax breaks are a form of compensation to help chipmakers after the cancellation of the VAT rebates," Li Ke, a director of the information department at the China Semiconductor Industry Association, said in a telephone interview yesterday.

"The R&D funding rules were announced today and the income tax breaks will follow soon," Li said, declining to give a timetable.

Before April 1, companies making chips in China were eligible for rebates from a 17 percent value-added tax on semiconductors, a break the US said cost its exporters US$344 million last year and violated global trade rules banning countries from favoring local producers over foreign companies.

China adopted the rebates, which reduce the tax burden by more than 80 percent, in 1999, before it joined the WTO, as part of a broader program to spur development of its chip industry.

The government asks chipmakers registered and based in China to apply for research and development funding, according to a statement posted on the Beijing-based China Semiconductor Industry Association Web site yesterday. The association represents 460 chipmakers in China.

Funding may reach as much as 50 percent of the project, the statement said.

The government also plans to widen chipmakers' income tax breaks to five years' exemption and five years at half rate, from the current two-year exemption and three years at half rate that is granted to preferred companies, Li said.

"The bigger chipmakers that are the backbone of the industry may even enjoy 10-year tax exemption," he said.
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