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Q&A: Breaking Down The Chip Shortage

Posted on October 2021November 2021 by info

Whether you’re the CEO of a manufacturing firm struggling to gain access to the materials needed for your production process or a consumer unable to find that new car you’ve been planning to buy — or both — you’ve likely seen the effects of the chip shortage firsthand.

As we enter the holiday season with no end in sight for the shortage, people everywhere are asking themselves: What’s going to happen next?

Eskander Yavar, BDO’s National Manufacturing Practice Leader, sat down with Tom Stringer, BDO’s Site Selection & Incentives Practice Leader, to dig deep into the chip shortage and answer some pressing questions: What’s causing it, how long will it last and why are there outsized impacts for the automotive sector?

Eskander Yavar: What caused the chip shortage?

Tom Stringer: Believe it or not, industry reports dating back before COVID-19 warned of the risk of a pending shortage, as demand for 200mm manufacturing equipment — which is critical to manufacture chips — outpaced production. Shortly after the pandemic hit, its disruption was immediately clear, as the demand for digital products and services dramatically increased and production lines were shuttered globally. Even though manufacturers and tech companies began to stock up on semiconductors in hopes of withstanding the storm, the spike in need for chips has yet to decline.

Eskander: Speaking of the evolving digital environment, where can the average consumer expect to find chips in their day-to-day products?

Tom: You’d be amazed — there are chips in products you wouldn’t suspect, including toothbrushes, washing machines, children’s toys and more. More apparent items include laptops, cellphones, cars and smart home appliances. The list goes on. And the number of chips per product vary by the complexity of its capabilities. For example, cars today come with a slew of new digital features requiring hundreds of chips and integrated circuits per vehicle. Additionally, with the expansion of artificial intelligence (AI) and the Internet of Things (IoT), the need for chips in day-to-day items is growing exponentially.

Eskander: Can you explain why the chip shortage has affected the automotive sector so significantly and how companies have responded?

Tom: At the outbreak of COVID-19, demand for cars dropped pretty drastically — after all, we were under stay-at-home orders, and daily commutes to work and school were replaced with virtual solutions. And above all, people were concerned for their health and didn’t want to risk travel, even domestically. For the average consumer, cars were no longer as much of a necessity. This is in addition to production shutdowns that idled the industry and reduced the available supply of new product. But as restrictions eased, cases leveled and vaccines became available, consumers were ready to spend the discretionary cash they’d saved over the past year. At the same time, many were looking forward to planning road trip vacations in lieu of air travel.

But chip production still hadn’t bounced back since the pre-COVID-19 demand surges. Dealership lots emptied quickly. As a result, many automotive manufacturers significantly cut production targets, and some temporarily shut down facilities or slow-rolled production, while others are rationing their chip supply for their more expensive models to capitalize on profit margins. In some cases, consumers have had to absorb the costs, whether by waiting additional months for production or paying more for models available.

Eskander: It’s important to note that although this disruption is severe, the automotive sector only makes up a portion of chip manufacturers’ customer base. Consumer electronics, some of which you previously listed, and tech companies are facing similar challenges. When can we expect the chip shortage to subside?

Tom: Unfortunately, we’ll likely continue to see its disruption for the next four to five years until production capacity returns. And in the second half of the decade, manufacturers will need to prioritize quality control and verify the legitimacy of their chip supply. Any time there’s heightened demand, there’s fraud right behind it. We’ll likely see counterfeit chips enter the market and our supply chains, which will cause cascading issues until verifiable and certified manufacturing capacity catches up to demand.

But the good news is there are solutions on the horizon. There’s legislation called the CHIPS for America Act, which is a Trump-era policy that the Biden administration has doubled down on. Its goal is to bring as much chip manufacturing technology to the U.S. as possible, because so much of its production and sourcing comes from international suppliers.

U.S. chip manufacturers have an opportunity to capture federal financial incentives by building new production capacity in the U.S. or repatriating existing capacity. Some have already made substantial investments in chip facilities and new 200mm equipment, but they’ll need to assess location criteria and capitalize on incentive savings to maximize value.

Eskander: It sounds like solutions will require considerable funding. In the meantime, chip manufacturers can consider refurbishing existing equipment to improve capacity. Nevertheless, it’s good to know there’s optimism.

The bottom line

The chip shortage isn’t going away, and its effects will ripple through global supply chains for years to come. Manufacturers must respond to the current impacts while also building chip shortage considerations into their business plan for the years ahead.

Consider these key steps to help preserve business continuity and respond to the ongoing impacts of the chip shortage:

Stay up to date on changing legislation and incentives related to the chip shortage to ensure you’re taking advantage of all possible opportunities to protect and strengthen your business.
Build additional security measures into your supply chain now to reduce vulnerability to fraud in the future.
Proactively communicate with your investors so they understand the impact of the chip shortage on your business and what that will mean for your business outlook over the coming months.
If you haven’t already, invest now in expanding your manufacturing capacity.
Incorporate considerations related to the chip shortage in your business continuity planning.

SALT Deduction Cap, States Have No Constitutional Claims To Challenge

Posted on October 2021October 2021 by info

Salt Deduction Cap

On October 5, 2021, the United States Court of Appeals for the 2nd Circuit affirmed a New York federal district court and rejected four states’ constitutional challenges to the $10,000 limitation on the federal income tax deduction for state and local taxes paid by individuals. This was enacted as part of the 2017 Tax Cuts and Jobs Act (the SALT deduction cap).

Four states – Connecticut, Maryland, New Jersey and New York – argued that the SALT deduction cap is unconstitutional. This is because because the SALT deduction is constitutionally mandated by the 16th Amendment, and alternatively. Secondly, the cap violates the 10th Amendment because it coerces states to abandon their preferred fiscal policies. While the District Court and 2nd Circuit agreed the states had standing to sue the federal government, the District Court’s dismissal of the case for failure to state a claim on the merits was upheld and affirmed by the 2nd Circuit.

The 2nd Circuit agreed with the District Court that an unlimited or “significant” SALT deduction is not constitutionally mandated by the 16th Amendment. After a lengthy discussion on the history of income taxation in the United States, as well as the history of SALT deduction, the court determined that nothing in the text of the Constitution (specifically under the 16th Amendment) or the history of the SALT deduction mandates a full deduction.

Further, the 2nd Circuit concluded that the SALT deduction cap does not unconstitutionally infringe on state sovereignty. The states argued the cap coerces them to abandon their preferred fiscal policies. The 2nd Circuit responded that it “agree[s] with the District Court that ‘the bare fact that an otherwise valid federal law necessarily affects the decisional landscape within which states must choose how to exercise their own sovereign authority hardly renders the law an unconstitutional infringement of state power.’” States failed to prove that their taxpayers’ total federal tax burden is so high that states cannot fund themselves.

Finally, the 2nd Circuit dismissed the states’ claim that the SALT deduction cap violates the independent constitutional principle of equal sovereignty. The 2nd Circuit reasoned the cap had no effect on state sovereignty. This is because the SALT deduction cap applies to all states, and the plaintiff states benefitted most from the pre-TCJA SALT deduction.

Insights

It is unknown whether the four states will petition for a writ of certiorari to ask the U.S. Supreme Court to accept an appeal of their case. Many states have enacted elective pass-through entity tax workarounds. This is to mitigate the SALT deduction cap’s impact on partners and shareholders of closely-held businesses.
The SALT deduction cap is also being negotiated in Congress as part of the $1.5 trillion infrastructure bill. It is uncertain whether a provision related to the cap will be included in the final bill.

Trump’s U.S Trade Policy With China Will Remain The Same

Posted on October 2021October 2021 by info

In a major disappointment for importers of goods from China who were hoping that the Biden administration would change the course of Trump’s U.S. trade policy with China, United States Trade Representative (USTR) Katherine Tai indicated on October 4, 2021 that the Section 301 ad valorem tariffs of 25% and 7.5% (depending on each item’s tariff code) will remain in place. Tai did indicate that the tariff exclusion process would be reimplemented. However, she did not provide specific information or details as to when this would occur. The highly anticipated address followed a lengthy internal policy review by the Administration. This review was expected to shed light on the strategy for China moving forward.

Tai pointed to China’s continued state subsidization of key industries that has harmed workers in the U.S. and other countries. These industries include solar panels and its current focus on semiconductors as reasons for continuation of the tariffs.

China has failed to meet its commitments under the “Phase One” agreement it previously entered into with the former Trump administration with regard to the purchase of U.S. agricultural products. The Biden administration will not pursue a phase two agreement. This is because little optimism exists for further negotiations to try and change Chinese behavior on industry subsidization, which is the primary source of contention.

Tai would not state whether the U.S. has plans to initiate another Section 301 investigation if China does not change its position regarding industrial subsidies. However, Tai said that Section 301 is a very important tool for trade enforcement. Tai said she intends to speak with her Chinese counterpart in the near future.

The tariff exclusion process in 2019-2020 allowed U.S. importers the opportunity to remove certain products from the imposition of Section 301 tariffs if the product was not available from non-Chinese sources and the tariffs created an economic hardship. The exclusion requests were filed with USTR, which determined on a case-by-case basis whether to grant the exemptions. All previously granted remaining exclusions expired on December 31, 2020. Although details have not yet been provided, the reimplemented exclusion process will likely be similar to the previous process. Importers should closely monitor announcements from USTR regarding the reimplementation of the exclusion process. Importers should also monitor other announcements such as filing dates and deadlines for the exclusion petitions.

How we can help

For now, Trump’s U.S. Trade Policy will remain in place. We can assist importers with the preparation and filing of exclusion requests with the United States Trade Representative. Should the exclusion request be granted, we can assist with file administrative protests for the refund of duties should the exclusions be effective retroactively. We can review the tariff classifications for products to determine if a previous tariff exclusion was available. We can also help determine if any refunds can still be claimed based on the entry date of the merchandise.

More information can be found at https://ustr.gov/