In August 2022, US President Joe Biden signed the CHIPS and Science Act of 2022 and the Inflation Reduction Act of 2022, and therefore, the two laws entered into force. The two laws provide significant incentives to encourage semiconductor manufacturing in the US and wide-ranging incentives for climate change policies in areas including the clean and renewable energy industries. As these laws may significantly affect Korean companies in the relevant industries, they must review the details and prepare for possible issues.
1. CHIPS and Science Act of 2022
On August 9, 2022, President Biden signed the CHIPS and Science Act of 2022 (Public Law No. 117-167, “CHIPS Act”) in order to provide federal aid (approx. USD 280 billion) to encourage the construction of microprocessor manufacturing facilities in the US. Under the title, Creating Helpful Incentives to Produce Semiconductors (“CHIPS”) for America Fund, the CHIPS Act includes (i) incentives to construct, modernize or expand semiconductor manufacturing facilities and equipment; (ii) Department of Commerce-led program to conduct high tech semiconductor R&D and workforce development; and (iii) additional programs regarding the supply chain, national security and international cooperation initiatives.
(1) Key Points
The CHIPS Act appropriates USD 54.2 billion for subsidies to support investment in facilities and equipment for semiconductor manufacturing, assembly, test, packaging and R&D capabilities in the US. The CHIPS Act provides subsidies for (i) the expansion and modernization of the existing semiconductor manufacturing facilities; (ii) workforce development and R&D; (iii) encouraging collaboration between the Pentagon and private companies; and (iv) facilitation of international technology security and innovation activities.
In addition, the CHIPS Act includes the so-called “guardrail provision,” which stipulates that a company that seeks CHIPS Act funding to enter into an agreement with the Commerce Secretary for a 10-year period beginning on the date of a CHIPS Act award will not engage in any “significant transaction” involving the “material expansion of semiconductor manufacturing” in China or any other foreign country of concern, which includes North Korea, Russia and Iran under 10 USC § 4872(d)(2), as well as any country the Commerce Secretary, in consultation with the secretaries of Defense and State and the Director of National Intelligence, determines to be engaged in conduct that is detrimental to the national security of United States foreign policy. However, the concept of a “significant transaction” excludes certain transactions, including investments in legacy chips (28 nanometer generation or older) and chips which are critical to national security approved by the US government.
In addition, the CHIPS Act allocates USD 1.5 billion of budgets to 5G technologies, open interface technologies, and interoperable radio access networks. The CHIPS Act also appropriates over USD 100 billion for R&D, technology transfer, innovation and STEM (Science, Technology, Education and Mathematics) education.
On August 25, 2022, President Biden signed an Executive Order to implement the semiconductor funding in the CHIPS Act. The Executive Order established an interagency CHIPS Implementation Steering Council. It also established six primary priorities to guide implementation across the federal government: (i) protect taxpayer dollars; (ii) meet economic and national security needs; (iii) ensure long-term leadership in the sector; (iv) strengthen and expand regional manufacturing and innovation clusters; (v) catalyze private sector investment; and (vi) generate benefits for a broad range of stakeholders and communities.
(2) Implications to Korean Companies
When President Biden signed the CHIPS Act, he expressed his expectations for the law to strengthen the US leadership in the semiconductor industry, creating 513,630 jobs between 2022 and 2026, and lowering the price volatility of chips by stabilizing the supply chain.
While the CHIPS Act provides incentives for investment in the US semiconductor industry, the subordinate rules and regulations will provide more relevant details. In this regard, the Executive Order signed on August 25, 2022 appears to be the first step towards implementing the actual rules and regulations. Korean companies need to closely monitor the rulemaking process and make sure that the rules reflect their views and opinions whenever necessary.
On the other hand, as a result of the “guardrail provision” of the CHIPS Act, companies seeking incentives under the CHIPS Act will be prohibited from making new investments in the semiconductor industry or expanding existing facilities in the “country of concern.”. As such, Korean companies will need to consider the pros and cons of receiving CHIPS Act funding.
2. Inflation Reduction Act
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (Public Law No. 117-169, “IRA”) which includes investment in climate change policy, a minimum corporate tax rate and healthcare funding.
(1) Key Points
The purpose of the IRA includes (i) lowering consumer energy expense; (ii) strengthening US energy security to decrease its dependence on China; (iii) investing in the de-carbonization of all economic sectors; (iv) investing in disadvantaged communities to share the benefits of transitioning into a green economy; and (v) supporting and facilitating the adoption of agriculture and forestry to the quickly changing climates.
To achieve these goals, the IRA introduces (i) a 15% minimum corporate tax rate; (ii) a reform of prescription drug prices; (iii) stronger enforcement of tax law by the IRS; and (iv) an excise tax on the repurchase of corporate stock. The IRA expects to raise approximately USD 790 billion for the next ten years through these measures and invest in climate change, energy security, healthcare, etc.
In particular, the IRA provides for the investment of USD 375 billion in energy security and climate change responses. With regard to these issues, the IRA provides for tax credits for (i) domestic production and sale of qualifying solar and wind components; (ii) construction of clean electricity production facilities; (iii) production of clean energy, including hydrogen; (iv) construction of energy-efficient properties; and (v) purchase of clean vehicles (electric vehicles and fuel cell vehicles). In addition, the IRA mandates federal government agencies to subsidize climate change policy and environmental policy. As one of the agencies, the Department of Energy (the “DOE”) must provide (i) subsidies for energy-efficient properties; (ii) loans to facilitate US domestic production of clean energy vehicles; and (iii) funding for interregional and offshore wind electricity transmission planning, modeling, and analysis, etc. In addition, the IRA mandates the Environment Protection Agency (the “EPA”) to establish a greenhouse gas reduction fund and to support programs that provide financial incentives to reduce greenhouse gas emissions and other air pollution emissions. The IRA also provides funding to the EPA for environmental and climate justice block grants that benefit disadvantaged communities.
Among these various programs, it is necessary to check the tax credits for clean energy vehicle purchases. The IRA provides that the maximum amount of tax credit for the purchase of a qualifying clean energy (cathode, plug-in electric and fuel cell) vehicle is USD 7,500. To qualify for the tax credit, the clean vehicles must meet the critical minerals requirement as well as the battery components requirement. To receive the USD 3,750 critical minerals portion of the credit, the vehicle’s battery must contain a threshold percentage (in value) of critical minerals that were extracted or processed in a country with which the US has a free trade agreement, or recycled in North America. The threshold percentage is 40% up to 2023, increasing to 50% in 2024, 60% in 2025, 70% in 2026, and 80% after 2026. To receive the USD 3,750 battery components portion of the credit, the percentage of the battery’s components (cathode, anode, electrolyte, and separator) manufactured or assembled in North America would have to meet threshold amounts. For vehicles placed in service through 2023, the threshold percentage is 50%. This threshold increases to 60% in 2024 and 2025, 70% in 2026, 80% in 2027, 90% in 2028, and 100% after 2028. Qualifying vehicles include those that were finally assembled in North America, and do not include any vehicles with battery components that were manufactured or assembled by a foreign entity of concern. In addition, for vehicles placed in service after 2024, qualifying vehicles do not include any vehicles in which applicable critical minerals in the vehicle’s battery were from a foreign entity of concern.
(2) Implications to Korean Companies
First, the IRA may increase the tax burden of Korean companies operating in the US. However, the increase of clean energy tax credits may benefit Korean companies engaging in clean and renewable energy businesses in the US.
In addition, Korean battery companies which are already manufacturing electric vehicle (“EV”) batteries, or planning to build EV battery factories may benefit from the IRA. Moreover, such Korean companies may also benefit from market access limitations against Chinese EV battery manufacturers, including CATL, the biggest competitor. However, there are concerns that Korean battery manufacturers may not significantly benefit from the IRA tax credits. In particular, one research by the Korea Institute for Industrial Economics and Trade (“KIET”) found that Korean companies’ total reliance on China for semi-finished battery products accounted for 78.2%, while their reliance on China for the sourcing of anode (85.3%), cathode (72.5%) and separator (54.8%) also exceeded 50%. As a result, there are concerns that Korean batteries may not meet the critical minerals requirement and the battery components requirement. In the case of EVs, the IRA excludes the EVs assembled in Korea for export to the US from tax credits. Korean EV makers and the EV battery industry are considering how to respond to those requirements.
In addition, the Korean government has raised issues with the US that the IRA’s clean vehicle tax credit provisions constitute violations of the national treatment principle under the World Trade Organization (“WTO”) law and the Korea-US Free Trade Agreement. The European Union also raised issues with the US, based on the arguments about violations of the national treatment principle under the WTO.
On the other hand, the IRA confirms that the US government supports and subsidizes the climate change response and renewable energy sectors. In this regard, solar and wind energy companies are expected to benefit from the IRA’s clean energy tax credits. In particular, considering that the solar industry shows considerable growth based on global de-carbonization efforts and the rise of fossil fuel prices, the IRA will likely facilitate the development of the solar power and related industry sectors.
Both the CHIPS Act and the IRA show that the Biden Administration’s policies are headed towards (i) the revival of US domestic manufacturing; (ii) securing technological advantage over China in key sectors; and (iii) fuller effort in climate change responses. Korean companies also need to closely monitor the rules and regulations implemented in the US, and take measures to make sure that their views and opinions are well heeded.
In addition, regarding areas which are found to be inconsistent with the international trade rules, including the clean vehicle tax credits under the IRA, Korean companies also need to closely monitor the responses of the key trading partners of the US, including the European Union.