The president of Intel, Paul Otellini, warned a federal panel addressing tax issues that because of high tax rates in the US, his company may build its next US$3 billion semiconductor factory overseas.
Otellini, who will become Intel's chief executive in May, testified Thursday at a hearing of the President's Advisory Panel on Federal Tax Reform that over the 10-year life of a state-of-the-art chip factory, the company would save US$1 billion by placing the factory in Asia or Europe rather than in the US. He said Intel, the world's largest chipmaker, would make its decision this year.
There would be some advantages to building in the US, near Intel's other factories, Otellini said. But while trade barriers and wage factors were significant issues in earlier decisions, taxes are now an important consideration, he said.
"The problem that we have and which the industry has is that it costs us US$1 billion more to operate inside the US than outside of the country," he said. "It's not wages and capital; its almost all attributed to tax benefits -- or the lack thereof -- in the United States compared to what is offered elsewhere."
While 12 of Intel's 16 factories are in the US, 75 percent of its sales are outside the country.
An industry analyst said Intel's decision was being closely watched by its competitors.
"This has huge ramifications throughout the industry," said Risto Puhakka, president of VLSI Research, a chip industry consulting firm based in Santa Clara, California. He said that in addition to low tax rates and incentives, the industry needed pools of labor to run advanced manufacturing plants, something Asian countries can provide.
Otellini said that while there are some state-level incentives for locating factories in the US, they are insignificant when compared to the 35 percent federal tax rate the company faces.
In contrast, Otellini pointed to Israel, which offers a 20 percent capital grant, a 10 percent tax rate and a two-year tax deferral. Malaysia offers a 10-year tax deferral and Ireland offers a 12.5 percent tax rate. Two-thirds of the most advanced factories being built, those producing 300mm chip wafers, are in Asia, Otellini said.
China has not attracted much advanced chip industry investment because of US restrictions on high-technology exports.
Otellini acknowledged the criticism that the semiconductor industry was asking for special treatment compared with other industries, but said he thought the country would benefit more from investments in "knowledge-based" industries.
Potential solutions to the foreign tax advantage might include cuts in US taxes, investment tax credits or permitting companies to take the full cost of building the factory as an expense during the first year, Otellini said.
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