What happened

Shares of Taiwan Semiconductor Manufacturing Company (TSMC) (TSM -1.67%) were moving higher on Monday after Taiwanese lawmakers passed a new law that gives a big tax credit to that nation's local chipmakers.

The move was the latest step in the global semiconductors arms race, in which the U.S. and China are both taking steps to ensure that they have sufficient semiconductor supply and control of key chip technologies.

As of 10:51 a.m. ET, Taiwan Semiconductor stock was trading up by 3.7% on the news.

So what

Under the newly passed law, Taiwanese chipmakers will be allowed to turn 25% of their annual research and development expense into tax credits, a sign that Taiwan is trying to retain its high share of global semiconductor production as other countries compete to have new factories built within their borders.

For a company the size of TSMC, such a credit could be significant. In its third quarter, the company reported $1.4 billion in research and development expenses, meaning the tax credit could boost its bottom line by as much as $1.4 billion annually, at its current rate of spending. That number will go up as it spends more on R&D in Taiwan.

The new law also gives Taiwanese chipmakers a 5% tax credit for buying new equipment that supports the most advanced chipmaking technologies, similar to a provision in the recently passed U.S. Chips Act.

The announcement also comes after TSMC agreed to invest $40 billion in two new foundries in Arizona. The U.S. is also making a push to increase domestic semiconductor production, especially after a recent shortage of chips slowed down auto manufacturing, sent car prices spiking, and impacted other industries as well.

Now what

Numerous nations are making efforts to cultivate better relationships with TSMC and other foundries, and Taiwan's move looks like just the latest governmental effort in that vein. And what's good for TSMC's bottom line is good for its stock.

TSMC landed on a lot of investors' radars after Warren Buffett's Berkshire Hathaway invested more than $4 billion in it. The company occupies an essential position in global trade as it is the world's largest third-party chip fabricator, responsible for  more than half of all chips produced by pure-play foundries. It's also growing fast and highly profitable, and the chip stock is cheap.

These new tax incentives from Taiwan could encourage similar moves by countries in other parts of the world, which would further pad TSMC's earnings.