A new policy guideline for the semiconductor industry is expected later this year, as China looks to the sector as a core part of its high-tech strategy.

Li Ke, an official with the China Semiconductor Industry Association, said the National Development and Reform Commission has organized a fresh round of consultation with experts and ministries, to figure out a policy for the development of the semiconductor business. The consultations have been held over several rounds, and ministries and organizations are now thought to be quite close to reaching an agreement on the guideline.

In 2000, China announced a guideline to encourage the development of the semiconductor and software industries, but plans for a value-added tax (VAT) reduction sparked angry complaints from the United States, Japan and the European Union.

The guideline said the VAT burden of semiconductor companies in China should not exceed 3 per cent, but it was believed to give an unfair advantage to domestic products over imported products, which are required to pay 17 per cent VAT.

Although China claimed the actual tax burden was different to the tax rate, the government agreed to scrap the proposed VAT reduction.

However, semiconductors, known as the heart of modern technology, are such a high priority that since 2004 the government has been considering new measures to support the semiconductor industry, without infringing the World Trade Organization's principles.

Li said yesterday that there are several drafts of the new measures and the government wants to formulate a mid-term plan for the industry, which will guide it over the coming five years.

One key component is a business income tax exemption and reduction.

Under the current Chinese taxation system, foreign-invested companies pay no income tax in the first two years after they begin to make a profit. In the next three years, the income tax rate is halved.

The new proposal says semiconductor companies will not need to pay income tax for the first five years after they become profitable, and will only pay half their income taxes over the next five years.

Yang Xueming, a member of the team drafting the 2000 guideline, said financial support for research and development is another targeted area.

China has already set up a 500 million yuan (US$62.5 million) fund to help semiconductor companies' research.

The proposals also include research loans, or using research expenditure to offset taxes.

Richard Chang, president and CEO of Shanghai-based Semiconductor Manufacturing International, the biggest semiconductor company on the Chinese mainland, said China could learn from Taiwan, where the government gave financial assistance to research and development.

He added the government should also tempt experts from overseas to work in China with income tax reductions.

Other proposed policies include allowing tax reductions on imported equipment, or setting up a special fund for integrated circuit design.

Yang estimated that China still needs 200 billion yuan (US$25 billion) of investment in the semiconductor industry before 2010, so the Government should also work out a plan to help companies get financial backing, as the semiconductor industry, especially manufacturing, is a cash-thirsty business.

Editor: Yan