President Biden Signs CHIPS and Science Act into Law

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On August 9, 2022, President Biden signed the CHIPS and Science Act (H.R.4346), which seeks to bolster the US semiconductor supply chain and promote research and development of advanced technologies in the United States.1 The Act is comprised largely of provisions extracted from the US Innovation and Competition Act (USICA) and its House alternative, the America COMPETES Act, which Congress failed to reconcile in conference negotiations this summer. The CHIPS and Science Act encompasses the most popular provisions of the USICA and COMPETES bills, but modifies and adds to those provisions in important ways. Key provisions and updates in the CHIPS and Science Act are as follows:

  • $52.7 billion appropriation for semiconductor incentives. The bill appropriates $52.7 billion over five years to fund grants, loans, loan guarantees, and other programs to incentivize semiconductor manufacturing in the United States (as proposed in the USICA and the COMPETES Act). 
  • "FABS Act" investment tax credit. The bill establishes a new 25 percent tax credit for investments in semiconductor manufacturing facilities in the United States (not envisioned in the USICA or the COMPETES Act). 
  • Limits on expansion of manufacturing capacity in China. The bill includes new "clawback" provisions that generally prohibit beneficiaries of the CHIPS funding and investment tax credit from expanding semiconductor manufacturing in China for a period of ten years (except for manufacturing of legacy chips). For recipients of CHIPS funding, these provisions establish a process of mandatory notification of planned relevant transactions in China, agency review of such transactions, and mitigation authorities, resembling the CFIUS process and recent legislative proposals for outbound investment screening.
  • $170 billion authorization for R&D programs. The bill authorizes nearly $170 billion in funding over five years for research and development initiatives across multiple federal agencies, roughly in line with the USICA and the COMPETES Act. This includes a $20 billion authorization for a new technology directorate within the National Science Foundation, which will award grants to fund research and development in areas such as artificial intelligence, advanced energy, data storage, and robotics. 

The CHIPS and Science Act creates significant new funding opportunities and potential tax benefits for companies exploring investments in the semiconductor supply chain and other critical technologies – albeit with significant conditions and restrictions that recipient companies will need to navigate. The legislation received substantial bipartisan support, passing the Senate by a margin of 64 to 33, but this was achieved in part by limiting the scope of the legislation to the core issues of semiconductor incentives and R&D funding. Other issues addressed in the USICA and the COMPETES Act were omitted, including trade provisions pertaining to Section 301 tariff exclusions, antidumping and countervailing duties, trade preference programs, and de minimis tariff treatment of China-origin goods. Members were unable to reach consensus on these trade provisions in conference, and the passage of the CHIPS and Science Act leaves them without a clear path to become law this year. 

This alert provides an overview of key provisions the CHIPS and Science Act and their implications. 

Financial Assistance Program for Semiconductors ($39 billion)

The CHIPS and Science Act appropriates $52.7 billion to fund semiconductor incentive programs authorized by the CHIPS for America Act of 2021.2 The majority of this appropriation ($39 billion) will fund a "Financial Assistance Program" for the semiconductor industry.3 This program, which the US Department of Commerce will administer, will provide Federal financial assistance to "covered entities"4 to incentivize "investment in facilities and equipment in the United States for the fabrication, assembly, testing, advanced packaging, production, or research and development of semiconductors, materials used to manufacture semiconductors, or semiconductor manufacturing equipment." The CHIPS and Science Act appropriates $19 billion for this program in FY 2022, and $5 billion annually thereafter through FY 2026. The bill also makes important changes to the terms of the Financial Assistance Program by way of amendments to the CHIPS for America Act (discussed below). 

Program overview

Under the Financial Assistance Program, covered entities may submit applications to the Secretary of Commerce seeking financial assistance for the construction, expansion, or modernization of qualifying facilities and equipment. The Secretary may grant financial assistance if the applicant satisfies certain eligibility criteria.5 Covered entities may use financial assistance awards to finance the construction, expansion, or modernization of facilities or equipment; to support workforce and site development; and to pay "reasonable costs related to the operating expenses" for a facility. Federal investment in any particular project may not exceed $3 billion, unless the Executive Branch certifies to Congress that a larger investment is necessary to: (1) "significantly increase the proportion of reliable domestic supply of semiconductors relevant for national security and economic competitiveness that can be met through domestic production;" and (2) "meet the needs of national security."6 No assistance may be granted under the program to a "foreign entity of concern," and a "technology clawback" provision requires the Secretary to "recover the full amount of an award" if the covered entity "knowingly engages in any joint research or technology licensing effort" with a foreign entity of concern and the technology or product at issue raises national security concerns.7 The law defines a "foreign entity of concern" to include any foreign entity that is "owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is listed in 10 U.S.C. § 2533c," which includes China, Russia, Iran, and North Korea. 

New "clawback" requirement related to expansion of manufacturing capacity in China

The CHIPS and Science Act makes several noteworthy changes to the terms of the Financial Assistance Program. The most significant is a new requirement that covered entities must refrain from expanding semiconductor manufacturing capacity in China for 10 years after receiving an award, or else they must forfeit the "full amount" of the award.8 Specifically, covered entities must enter into an agreement with the Secretary of Commerce specifying that, during the 10-year period beginning on the date of the award, the covered entity "may not engage in any significant transaction, as defined in the agreement, involving the material expansion of semiconductor manufacturing capacity in the People's Republic of China or any other foreign country of concern."9 

The 10-year prohibition does not apply to existing facilities or equipment for manufacturing legacy semiconductors, or to "significant transactions" involving the material expansion of manufacturing capacity that produces legacy semiconductors and "predominantly" serves the market of a foreign country of concern. The bill defines legacy semiconductors to include semiconductor technology that is of the 28 nanometer (nm) generation or older for logic, as well as "memory technology, analog technology, packaging technology, and any other relevant technology. . .relative to the 28nm and older generation," as determined by the Secretary of Commerce. Any semiconductor technology that the Secretary determines to be "critical to national security" would not qualify as "legacy" technology. The bill authorizes the Secretary to expand the definition of legacy technology periodically through a public notice and comment process. 

To enforce the 10-year prohibition, the bill establishes a process of mandatory notification, agency review, and mitigation that resembles the CFIUS process and recent legislative proposals for outbound investment screening. This process is as follows: 

  • Notification requirement. During the 10-year period after receiving an award, covered entities must notify the Secretary of Commerce of any planned significant transactions involving the material expansion of semiconductor manufacturing capacity in China or any other foreign country of concern.
  • DOC determination. Within 90 days after receiving a notification from a covered entity, the Secretary of Commerce must determine whether the transaction would violate the covered entity's 10-year agreement, and must notify the covered entity of the determination. 
  • Opportunity to remedy. If the Secretary of Commerce determines that the planned transaction violates the covered entity's agreement, the covered entity will have 45 days to provide "tangible proof" that the transaction has been abandoned. If the covered entity does not do so, the Secretary "shall recover" the full amount of the financial assistance provided to the covered entity, unless the parties can reach agreement on mitigation measures.
  • Mitigation. If the Secretary determines that a covered entity could take measures to mitigate any national security risk stemming from the planned transaction, the Secretary may negotiate, enter into, and enforce an agreement or condition for mitigation, and may waive the statutory requirement to recover the financial assistance award. 

The law authorizes the Secretary of Commerce to promulgate regulations implementing these requirements. 

Other notable changes to the Financial Assistance Program

The CHIPS and Science Act makes several other noteworthy changes to the Financial Assistance Program, including:

  • Expanding the scope of the program to include upstream suppliers of semiconductor manufacturing equipment and materials used to manufacture semiconductors;
  • Providing express authority for the Secretary of Commerce to provide financial assistance in the form of loans or loan guarantees (which may account for up to $6 billion of the $39 billion appropriation);
  • Establishing additional eligibility criteria, including requirements that covered entities must have plans in place to identify and mitigate supply chain security risks; and
  • Establishing a dedicated sub-program to provide financial assistance for assembly, testing, or packaging of semiconductors at "mature technology nodes," and setting aside $2 billion of the total appropriation to implement this sub-program. 

Other CHIPS for America Act Programs ($13.7 billion)

The bill appropriates $13.7 billion for other programs authorized by the CHIPS for America Act, including: 

  • $11 billion for workforce and research and development programs administered by the Department of Commerce (including the National Semiconductor Technology Center and the National Advanced Packaging Manufacturing Program); 
  • $2 billion for a CHIPS for America Defense Fund, which will be used to establish a national network for microelectronics research and development; 
  • $500 million for a CHIPS for America International Technology Security and Innovation Fund, which will be used to coordinate with foreign government partners on semiconductor supply chain issues; and 
  • $200 million for a CHIPS for America Workforce and Education Fund, which will seek to promote growth of the US semiconductor workforce.

New Investment Tax Credit for Semiconductor Manufacturing

The CHIPS and Science Act establishes a new tax credit for investments in semiconductor manufacturing facilities in the United States, based on the Facilitating American-Built Semiconductors (FABS) Act introduced by Senators Ron Wyden (D-OR) and Mike Crapo (R-ID).10 The credit is equal to 25 percent of the value of a qualified investment in a facility for which the primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment. The credit is available with respect to facilities for which construction begins on or before December 31, 2026. The Congressional Budget Office estimates that this credit will result in tax expenditures of approximately $24 billion. 

Much like the CHIPS funding, the new investment tax credit includes provisions designed to discourage recipients from expanding semiconductor manufacturing capacity in China:

  • Taxpayers are ineligible to claim the credit if, during the taxable year, they engage in an "applicable transaction," defined as a "significant transaction . . . involving the material expansion of semiconductor manufacturing capacity" in China or a foreign country of concern (except for transactions that primarily involve manufacturing capacity for legacy semiconductors).11 
  • If a taxpayer receives the credit and subsequently engages in an "applicable transaction" during the 10-year period after the facility is placed in service, the taxpayer would forfeit the credit in its entirety.12 

Research and Development, Competition, and Innovation Act

Division B of the CHIPS and Science Act, entitled the Research and Development, Competition, and Innovation Act, authorizes nearly $170 billion in funding over five years for research and development initiatives across multiple federal agencies, including the National Science Foundation, the Department of Commerce, the Department of Energy, and the National Institute of Standards and Technology. This amounts to an $82.5 billion increase over the baseline of authorized funding, representing "the largest five-year investment in public R&D in the nation's history," according to the bill's proponents.13 The legislation covers a broad array of programs, including initiatives to fund research and development of advanced technologies, promote research security, develop standards in areas such as cybersecurity and advanced communications, and promote energy security. 

Among other notable provisions in Division B, and particularly relevant to the bill's theme of technological competition with China, the bill authorizes a $20 billion appropriation for a new "Directorate for Technology, Innovation, and Partnerships" within the National Science Foundation.14 The Directorate is authorized to make financial awards to private entities and other institutions (excluding "entities of concern") for research and technology development within "key technology focus areas." The bill specifies ten "key technology focus areas" that are eligible for such awards:

  • Artificial intelligence, machine learning, autonomy, and related advances;
  • High performance computing, semiconductors, and advanced computer hardware and software;
  • Quantum information science and technology;
  • Robotics, automation, and advanced manufacturing;
  • Natural and anthropogenic disaster prevention or mitigation;
  • Advanced communications technology and immersive technology;
  • Biotechnology, medical technology, genomics, and synthetic biology;
  • Data storage, data management, distributed ledger technologies, and cybersecurity, including biometrics;
  • Advanced energy and industrial efficiency technologies; and
  • Advanced materials science.

Also notable is the inclusion of the Steel Upgrading Partnerships and Emissions Reduction (SUPER) Act, which establishes a program within the Department of Energy that aims to reduce carbon emissions associated with the production of iron, steel, and steel mill products.15 This program will focus on several key technologies for reducing emissions from steelmaking, including heat generation, carbon capture, smart manufacturing, resource efficiency, alternative materials, and high-performance computing. As part of the program, DOE will support an initiative for the demonstration of low-emissions steel manufacturing in collaboration with industry partners. 

Outlook

The CHIPS and Science Act creates significant new funding opportunities and potential tax benefits for companies exploring investments in the semiconductor supply chain and other critical technologies in the United States. At the same time, the law imposes stringent conditions on companies seeking to benefit from these incentives, reflecting the sensitive geopolitical and national security considerations that informed the law's design. Given these sensitivities and the amount of funding involved, Congress is likely to exercise careful oversight regarding the allocation of the new incentives, and recipient companies will face scrutiny regarding their compliance with the law's requirements concerning overseas investments. Over time, the novel "clawback" provisions included in the CHIPS and Science Act could inspire similar legislation targeting other sectors, given the growing congressional interest in outbound investment screening in sectors deemed critical to national security. 

The CHIPS and Science Act also represents an important evolution of the United States' longstanding posture regarding industrial subsidies. The United States has long expressed concern about the market-distorting effects of industrial subsidies maintained by other countries, and has sought to address them primarily through trade enforcement and dispute settlement, new FTA disciplines, and proposed reforms to WTO rules (the latter being a focus of trilateral discussions with the EU and Japan in recent years). More recently, the Biden Administration and Members of Congress of both parties have argued that the United States must respond to foreign subsidization of the semiconductor industry by offering commensurate subsidies of its own, as envisioned in the CHIPS and Science Act (which is expressly intended to "erase the difference with foreign subsidy regimes."16 Following the passage of the CHIPS and Science Act, US Trade Representative Katherine Tai stated that the United States should "keep replicating this for other industries," especially those that face "stiff competition from economies that are not structured like ours," calling this approach "the key to American competitiveness going forward."17 This shift in the United States' posture may further complicate efforts to advance new trade disciplines regarding industrial subsidies, and there are indications that the United States has already begun to pull back from some of those efforts.18 

Though the CHIPS and Science Act is derived largely from the USICA and the COMPETES Act, it omits the trade provisions proposed in those two bills. Key trade provisions in the USICA would reinstate exclusions from the Section 301 tariffs on China-origin goods, require USTR to accept new exclusion requests, and reauthorize expired trade programs such as the Miscellaneous Tariff Bill and the Generalized System of Preferences.19 Key trade provisions of the COMPETES Act include amendments to US trade remedy law (designed to favor domestic petitioners), reauthorization of trade adjustment assistance for displaced workers, and a prohibition on "de minimis" tariff treatment for China-origin goods.20 In conference negotiations for the USICA and the COMPETES Act, Members of Congress struggled to reconcile the trade titles of the two bills, owing not only to partisan differences over trade policy, but also to fissures within the parties on sensitive issues such as Section 301 tariff relief. Following these and other disagreements, the conference negotiations were put on hold in July, and Members agreed to proceed separately with the elements of the two bills that had broad consensus (i.e., those reflected in the CHIPS and Science Act). 

Democratic leaders have expressed hope that conference negotiations on the remaining elements of USICA and the COMPETES Act will resume after Congress returns from its August recess, providing another opportunity to reach a compromise on trade legislation. For the time being, however, there is no indication that this will occur, and any effort to salvage a conference bill will face significant obstacles. By the time Congress returns from its August recess, just two months will remain before the mid-term elections, and electoral politics will complicate any effort at legislative compromise. Moreover, even after the mid-term elections, it is unclear whether there will be sufficient political will to reach agreement on a conference bill, especially now that the most popular elements of the USICA and COMPETES Act have passed separately through the CHIPS and Science Act. Recognizing these difficulties, some Members have expressed hope that outstanding trade provisions could be attached to other "must-pass" legislation during the lame duck session (e.g., a year-end spending bill), but the prospects for this are highly uncertain. 

Please let us know if you have questions.

1 The text of the CHIPS and Science Act can be viewed here.
2 Congress enacted the CHIPS for America Act in January 2021 as part of the National Defense Authorization Act (NDAA) for Fiscal Year 2021.2 The CHIPS for America Act is codified at 15 U.S.C. § 4651 et seq. 
3 15 U.S.C. § 4652. 
4 The law defines a covered entity is defined as "a nonprofit entity, a private entity, a consortium of private entities, or a consortium of nonprofit, public, and private entities with a demonstrated ability to substantially finance, construct, expand, or modernize a facility relating to fabrication, assembly, testing, advanced packaging, production, or research and development of semiconductors, materials used to manufacture semiconductors, or semiconductor manufacturing equipment." 15 U.S.C. § 4651(2). 
5 For example, the covered entity must have "an executable plan to sustain the facility," "an executable plan to identify and mitigate relevant semiconductor supply chain security risks," and must have made "commitments to worker and community investment," among other criteria. 15 U.S.C. § 4652(a)(2)(B). 
6 15 U.S.C. § 4652(a)(3)(B). 
7 15 U.S.C. § 4652(a)(2)(C)(iv) and (a)(5)(C). The law defines a "foreign entity of concern" as any foreign entity that is: 
(A) designated as a foreign terrorist organization by the Secretary of State under section 219 of the Immigration and Nationality Act (8 U.S.C. 1189); 
(B) included on the list of specially designated nationals and blocked persons maintained by the Office of Foreign Assets Control of the Department of the Treasury; 
(C) owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is listed in section 2533c of title 10, United States Code; or 
(D) alleged by the Attorney General to have been involved in activities for which a conviction was obtained under (i) chapter 37 of title 18, United States Code (commonly known as the "Espionage Act") (18 U.S.C. 792 et seq.); (ii) section 951 or 1030 of title 18, United States Code; (iii) chapter 90 of title 18, United States Code (commonly known as the "Economic Espionage Act of 1996"); (iv) the Arms Export Control Act (22 U.S.C. 2751 et seq.); (v) sections 224, 225, 226, 227, or 236 of the Atomic Energy Act of 1954 (42 U.S.C. 2274–2278; 2284); (vi) the Export Control Reform Act of 2018 (50 U.S.C. 4801 et seq.); or (vii) the International Economic Emergency Powers Act (50 U.S.C. 1701 et seq.); or 
(E) determined by the Secretary, in consultation with the Secretary of Defense and the Director of National Intelligence, to be engaged in unauthorized conduct that is detrimental to the national security or foreign policy of the United States under this Act.
8 15 U.S.C. § 4652(a)(6), as amended. 
9 The term "foreign country of concern" is defined as a country that is a "covered nation" for purposes of 10 U.S.C. 4872(d) (i.e., China, Russia, Iran, and North Korea,", as well as "any country that the Secretary, in consultation with the Secretary of Defense, the Secretary of State, and the Director of National Intelligence, determines to be engaged in conduct that is detrimental to the national security or foreign policy of the United States." 15 U.S.C. § 4651(7). 
10 This tax credit is codified at new 26 U.S.C. § 48D. 
11 26 U.S.C. § 48D(c).
12 26 U.S.C. § 50(a)(3), as amended.
13 CHIPS and Science Act House Leadership Fact Sheet
14 Division B, Title III, Subtitle G. 
15 Division B, Title VI, Subtitle M. 
16 CHIPS and Science Act House Leadership Fact Sheet. See also "With Funding Stalled, Chip Makers Warn Congress the U.S. Is Lagging," New York Times, June 17, 2022
17 "Tai: U.S. must 'keep replicating' CHIPS Act efforts for other industries," Inside US Trade, August 8, 2022
18 In July 2022, Ms. Sabine Weyand, EU Director-General for Trade, indicated that the Biden Administration has sought to shift the focus of the trilateral discussions on industrial subsidies away from the development of new trade disciplines. See "U.S. puts trilateral Chinese subsidies work on a new course," Politico Pro, July 14, 2022
19 For an overview of these provisions, please refer to the W&C US Trade Alert dated June 18, 2021.
20 For an overview of these provisions, please refer to the W&C US Trade Alert dated February 4, 2022.

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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.

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