Chip trade group chastises China

The World Semiconductor Council, a conglomeration of industry organizations such as the U.S. Semiconductor Industry Association (SIA), this week urged China to open its market fully to all foreign semiconductor products by reforming what is known in the industry as a "value added" tax policy.

According to the SIA, China's tax policy in question discriminates against foreign products by applying a 17 percent tax on sales of all imported and domestically produced semiconductors and integrated circuits, but offering a rebate for domestic products. Because of the rebate, integrated circuits manufactured within China face a value-added tax rate of 6 percent, while integrated circuit designs developed in the country face a value-added tax rate of 3 percent, according to the association.

"China made great strides in opening its market as part of its WTO (World Trade Organization) accession, but the discriminatory application of the value-added tax negates the benefits it promised to provide when it joined the WTO," SIA President George Scalise said in a statement Thursday. "The semiconductor industry is calling on China to honor its WTO commitments by eliminating the discriminatory value-added tax on all semiconductors, which will also help China by lowering the cost of access to information technology goods for its consumers."

An official at the Chinese embassy in the United States did not immediately return a call for comment.

The World Semiconductor Council issued its complaint against China Thursday at its seventh annual meeting, which was held in Nice, France. Other organizations in the council include the Japan Electronics and Information Technology Industries Association and the Korea Semiconductor Industry Association.

The SIA named China the world's fastest-growing chip market. According to the organization, China will account for nearly 11 percent of world semiconductor demand in 2003, up from only 3 percent in 1998.

In addition, SIA spokeswoman Molly Tuttle said China is the fastest-growing producer of semiconductors in the Asia-Pacific region, which is itself the fastest-growing region in terms of production.

The SIA says it opposes the value-added tax rebate, even though the rebate benefits both domestic and foreign-owned facilities in China.

Dean McCarron, president of market analysis firm Mercury Research, suggested the rebate policy is unwelcome for U.S. companies, partly because they are forced to invest in China to get the lower tax treatment. "I can see how non-Chinese companies would be less-than-thrilled by this particular tax (policy)," he said.

The SIA has been trying to reform China's value-added tax rebate policy since the country joined the WTO in December 2001, Tuttle said. But the group has been careful not to step too hard on the toes of the emerging tech powerhouse. "It's very friendly," she said of the effort. "We obviously want to do business there."