CEO’S NOTE

FOUR JOBS FOR CONGRESS

WE’RE ONCE AGAIN IN THE SILLY SEASON OF American politics. As difficult as it may be, the U.S. business community needs leaders of both parties to put aside their differences, use some common sense and remove barriers. Here are four places to start.

Federalize Cyber

The defense of American business has been a bedrock principle of American government ever since our new nation’s ships were being plundered by the Barbary pirates, who seized our commerce vessels and held sailors for ransom. By 1800, the U.S. was paying an astonishing 20 percent of annual government revenue as “tribute” to the pirates. Only with the development of the Navy did the U.S. began to fight back and win.

Today, we face the same dilemma in cyberattacks, and we are repeating the policies that failed. Individual companies often find it in their best interests to meet the demands of cybercriminals rather than report the crime or fight back. While that frequently resolves individual attacks, the payoffs incentivize criminals to continue targeting businesses, creating an endless, escalating spiral.

The only possible path to defeat this scourge is collective action by the Feds, which must mobilize resources and develop the will to unequivocally prosecute and destroy those who attack American commerce via the Internet.

Simplify Contractor/Employee Definitions

U.S. laws that classify employees versus contractors are badly antiquated, open to wide interpretation and poorly adapted to today’s work environment. The IRS’s attempt to “clarify” this issue is providing guidance via form SS-8, which elicits answers to 44 questions, about half of which are open-ended and most of which provide no insights on how to properly classify people (e.g. “What types of reports are required from the worker? Attach examples”).

Rather than demanding that every contractor be an employee or making it difficult to maintain contracting relationships, as some states do, wouldn’t a better policy be to ask both contractor and employer each year to voluntarily renew (or not) their contracting relationship? Should the contractor feel that the relationship has changed to an employee-employer relationship, both parties would have the opportunity to choose to change that status, rather than it being forced on them. Congress can make this happen.

Harmonize Cross-State Commerce Laws

In 2018, the U.S. Supreme Court handed down a decision in South Dakota vs. Wayfair that allows each state to require any business that sells within its borders to collect and remit sales tax even if the business has no physical presence in that state. Every U.S. business with cross-border sales must now track the changing rules and thresholds in all 50 states and file reports and remit payments as it crosses each different threshold. Pennsylvania, for example, has a $500,000 annual revenue receipts threshold, while Maryland has a $200,000 or 200-transaction threshold. Worse still, most state rules are retroactive once you hit the tripwire.

For small and medium businesses, these rules are overly complex and unfair. Congress should enact and implement an annual revenue minimum to free small and midsized businesses from this patchwork of state laws. Or it should negotiate a standard cross-state tax rate for tracking and remittances.

Negotiate an Immigration Policy

The U.S. faces severe labor shortages that are crippling multiple industries, including agriculture, manufacturing, hospitality, food service and healthcare. At the same time, a lack of border security threatens the welfare and safety of border states. All this leaves CEOs in the lurch, unable to meet market demands for goods and services or plan for the future.

Congress needs to secure our borders and implement a working immigration policy that enables work-willing immigrants who share our values and are vetted for security and health concerns to legally enter and work in this country. Skilled professionals, including engineers and scientists, should similarly be vetted and welcomed to this country to continue our proud tradition of attracting innovators to our shores.

None of these issues are simple. But they’re not unsolvable either. Even in Washington.

—Marshall Cooper, CEO, Chief Executive Group

How the CHIPS Act Could Affect the U.S. and Your Business

BY DARIN BUELOW AND ALEX DUNLAP

SEMICONDUCTORS HAVE EVOLVED from being devices found only in advanced electronics to being integral to virtually every electronic device on which companies rely. From the trucks that deliver our products and the computers that we use to send emails and track sales, down to the coffee machine in the break room, businesses cannot escape some relationship to semiconductors. The chip industry trickles down into almost all aspects of the U.S. economy, including electronics vital to national security, such as defense, cybersecurity, healthcare and domestic energy industries. To help encourage investment in the U.S. semiconductor industry, President Biden signed the $50-billion-plus CHIPS Act into law in August1 of 2022. There are several factors that likely contributed to the passage of the CHIPS Act: 1. Covid lockdowns caused worldwide chip manufacturing to slow in 2020, while simultaneously skyrocketing sales in work-from-home electronics, virtual learning and healthcare industries, exacerbating a supply/demand imbalance. 2. The U.S. share of global semiconductor manufacturing has dropped from 37 percent to just 12 percent since 1990.

Increasing labor costs and regulation have made it approximately 25-50 percent more expensive to construct and operate a semiconductor facility in the U.S. compared to overseas.2 3. Today, 75 percent of the world’s chip manufacturing is concentrated in East Asia. Investment-attracting policies coupled with attractive manufacturing wages have caused this area of the globe to dominate global chip production.3 The CHIPS Act is a bold play by the U.S. government to attract chip manufacturing investment to the U.S. and alleviate our dependence on East Asian chips. The cornerstone of the CHIPS Act is the “Advanced Manufacturing Tax Credit” (AMTC) of 25 percent of depreciable property of any “advanced manufacturing facility” associated with semiconductor production. Additionally, projects that qualify for CHIPS Act funding will also receive “coordinated permitting” between federal agencies to speed up the often one-year-pluspermits necessary to begin construction on manufacturing facilities. The $52 billion CHIPS Act is predicted to stimulate over $140 billion in direct investments before the construction cutoff date.5 By comparison, South Korea recently offered up to 50 percent in investment tax credits to new semiconductor facilities, spurring over $151 billion in investment commitments between now and 2030 from a single large chip producer.6 Such government incentives and

favorable operating structures have helped catapult South Korea to be the No. 2 global producer of non-memory semiconductors and No. 1 in memory semiconductors.7 Likewise, Taiwan sits securely in the No. 1 global position for overall semiconductor production, responsible for approximately 63 percent of global chip production between 2020 and 2021.8 While Taiwan has not doled out large tax incentives as readily as South Korea, the government did partake “Such a step-change in spurring the creation of multiple semiconductor expansion of the US companies in the 1980s, and then housing them in semiconductor manufacturing a dedicated “science park.”9 Similar to Silicon Valley industry over the next 5-10 tech companies, this cluster of small chip makers years may likely have competed, innovated and eventually grew into transformational impacts some of the largest semiconductor companies in on the states and communities the world. In 2020, Taiwan’s largest chip producer that receive wafer has grown to command a 54 percent share of the fab investments” global semiconductor manufacturing market, the largest in the world by far.10 Considering the already $60 billion investment announcements in chip facilities in 2022 thus far and the historical success of tax incentives to the semiconductor industry, it is expected that the CHIPS Act will increase the U.S.’s global share of semiconductor production and reduce U.S. reliance on foreign chips. Such a step-change expansion of the U.S. semiconductor manufacturing industry over the next 5 to 10 years may have transformational impacts on the states and communities that receive wafer fab investments. Growth in technical talent development, expansions in infrastructure, responses by academia to meet the demand for specialized degrees and movement by semiconductor industry suppliers are just a few potential examples of local impacts. If you believe your business may qualify for CHIPS Act funding, keep an eye out for government rules, guidelines and updates on how to qualify and ensure that your overseas operations do not affect your eligibility. As new production facilities ramp up in the coming years, we may expect to see the global chip shortage ease. Leaders should understand how specific types of semiconductors operationally and financially affect their business, closely follow current and projected supply, and prepare for at least some degree of improvement over the pandemic-induced global chip shortage. Darin Buelow (dbuelow@deloitte.com) is a principal and Alex Dunlap is a consultant at Deloitte Consulting LLP, where they provide clients with real estate and location strategy solutions. 1https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/09/fact-sheet-chips-andscience-act-will-lower-costs-create-jobs-strengthen-supply-chains-and-counter-china/ | 2https:// www.semiconductors.org/wp-content/uploads/2021/09/2021-SIA-State-of-the-Industry-Report.pdf | 3https://www.trendforce.com/presscenter/news/20210305-10693.html | 5https://www.semiconductors.org/wp-content/uploads/2021/09/2021-SIA-State-of-the-Industry-Report.pdf | 6https://wccftech. com/samsung-increases-chip-investment-to-151-billion-amidst-50-tax-break-promises-in-korea/ | 7https://asiatimes.com/2022/07/in-chip-war-korea-spends-big-to-stay-ahead-of-china/ | 8https:// www.trendforce.com/presscenter/news/20210305-10693.html | 9https://history-computer.com/taiwan-semiconductor-history/ | 10https://www.trendforce.com/presscenter/news/20210305-10693.html This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright © 2022 Deloitte Development LLC. All rights reserved. SOURCES: https://www.semiconductors.org/wp-content/uploads/2021/09/2021-SIA-Stateof-the-Industry-Report.pdf | https://www.trendforce.com/presscenter/news/20210305-10693. | html https://history-computer.com/taiwan-semiconductor-history/ | https://www.reuters.com /technology/us-chip-industry- split-over-chips-act-benefits-intel-sources-2022-07-18/ | https://asiatimes.com/2022/07/in-chip-war-korea-spends-big-to-stay-ahead-of-china/ | https://wccftech.com/samsung-increases-chip-investment-to-151-billionamidst-50-tax-break- promises-in-korea/ | https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/09/fact-sheet-chips-and-scence-act-will-lower-costs-create-jobs-strengthen-supply-chains-and-counter-china/