A taxing diplomatic dilemma discourages Taiwanese companies from expanding in the US. Punitive double taxation has been an unresolved issue for years. Now that the US wants to increase domestic chip production, some politicians want the US to offer a better deal to companies like Taiwan Semiconductor Manufacturing Company. Any change would likely spark geopolitical problems.
Shares of TSMC have long traded at a discount to global peers despite record earnings and a dominant position in contract chip market share. At just 16 times forward earnings, the stock trades at a multiple that is less than a third of US peer Intel. Part of that discount reflects the risk of Chinese attacks on Taiwan.
The situation is growing more urgent as TSMC finishes an advanced chip plant in Arizona. The US wants more local plants to be built. Taiwanese officials have asked for an agreement to ease the burden of double taxation for more than five years.
For TSMC, the estimated effective tax rate runs over 50 per cent on profits earned in the US. TSMC workers in the country are also highly taxed. Peers such as Samsung operate at a much lower levy thanks to a tax treaty that South Korea has with the US.
The odds of a similar deal for Taiwan look slim. This poses a problem. Fabrication sites typically need more than 10,000 employees. Samsung’s facility in Texas had more than this number before it announced expansion plans last year, which should double the total.
Most employees are highly skilled engineers. Sourcing local staff is tough, especially in the early stages. The semiconductor industry has struggled to hire and retain staff globally. TSMC would prefer to move existing staff to the US. But some in the US will oppose favourable employment terms for overseas workers.
Everyone wants a compromise. But solutions risk igniting a difficult diplomatic problem. The US does not see Taiwan as a sovereign nation. Any special tax deal would acknowledge sovereignty. China could regard this as provocation.
The complexity and cost suggest multinational companies in Taiwan cannot easily set up in the US. In turn, TSMC’s low valuation may not change simply by expanding into its biggest market, two-thirds of its revenues. Investors must continue to weigh both the military and financial risks from China’s diplomatic pressure.