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US Is Not Tax Competitive, Intel Boss Tells Lawmakers

by Mike Godfrey,, Washington

26 June 2006

To be competitive in the global marketplace, US tax policy needs to focus on offering tax treatment that is comparable, if not more favourable, than that which is offered by other nations competing for investments, according to Craig Barrett, Chairman of Intel, the semiconductor manufacturer.

Testifying last week at a House Ways and Means Committee hearing on international tax policy, Barrett observed that the US tax system has become uncompetitive in comparison to the many countries which offer "very significant incentive packages and have highly favourable tax systems," particularly in Asia.

Barrett pointed out that Malaysia provides a 10-year tax holiday, and tax depreciation for capital building and equipment costs equal to 160% of their cost. He also noted other countries with considerable tax advantages, including: Ireland, with its 12.5% corporate tax rate and a 20% research tax credit; Israel, with a capital grant of up to 20%, a 10% tax rate and a two-year tax holiday; and China, which grants a 5-year tax holiday, followed by 50% of the normal tax rate for 5 more years.

By comparison, the US has a 35% corporate tax rate, few investment incentives, and relatively uneconomic and uncompetitive depreciation treatment, the Intel chief told lawmakers.

"From just this sample of tax systems and incentives available in other countries, you can see that the US compares relatively poorly, and effectively an economic penalty on investment in the US is imposed," he stated.

According to Barrett, a critical issue that Intel considers when deciding where to locate a new wafer fabrication plant is that it costs $1 billion dollars more to build, equip, and operate a factory in the US than it does outside the US - the largest portion of which is attributable to taxes.

Barrett explained that the billion dollars is the difference between the net present cost over ten years of building and operating the wafer fabrication facility in the US, estimated to be as much as $6.8 billion, compared to the net present cost over ten years of building and operating the same facility outside the US, estimated to be as little as $5.6 billion.

While the majority of Intel's plants are located in the United States, Barrett told the committee that "considerable business reasons exist for locating a number of our wafer fabrication facilities in foreign locations."

Last week, Intel officially opened its third high volume manufacturing facility in Ireland - said to be the most modern of its type anywhere in the world. However, in the industry in general, two-thirds of the new 300 millimeter wafer fabrication facilities currently under construction, being equipped, or in production are located in Asia. If all types of plants are considered, China leads with eighteen semiconductor plants.

Barrett argued that there are several potential solutions to close the gap in tax competitiveness between the US and the rest of the world. These include a corporate rate reduction, an investment tax credit (ITC), full expensing of a factory in year one (or expensing plus a write-off of an additional percentage above and beyond the facility’s cost), or a combination of these items.

Barrett also said that a permanent extension to the Research and Development Tax Credit, which expired last year, is "long overdue."



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