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Impact of Taxes on U.S. Semiconductor Company Decisions

This article explores the impact of taxes on U.S. semiconductor companies, using Intel Corporation as a case study. It highlights the importance of research and development (R&D) and production facility location in determining U.S. competitiveness. The article also discusses the need for a permanent R&D tax credit and the cost differences driven by tax treatment, capital grants, and other local factors.

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Impact of Taxes on U.S. Semiconductor Company Decisions

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  1. Impact of Taxes on U.S. Semiconductor Company Decisions Paul S. Otellini President and Chief Operating Officer Intel Corporation March 31, 2005

  2. Intel Snapshot • Founded in 1968 • World’s Largest Semiconductor Company • ~75% of the company’s $34 billion in sales are outside the U.S. • 80,000 employees; 60% in U.S. • 12 of 16 factories in the U.S. • Semiconductor manufacturing is • R&D-intensive + BOTH HAVE TAX • Capital-intensive IMPLICATIONS

  3. U.S. Competitiveness • Research and the location of production facilities critically affect U.S. competitiveness • Especially as the U.S. becomes increasingly a knowledge-based economy

  4. Intel R & D ~ 80% in U.S.

  5. R&D Tax Credit • R&D Tax Credit has never been permanent • R&D planning demands a long-term view • Short-term extensions and lapses dilute the incentive value of this credit • Permanent R&D Tax Credit is long overdue

  6. Intel Capital Expenditures ~ 70% in U.S.

  7. PROBLEM: It costs $1 billion more to build and operate a chip factory in the U.S. than outside…the biggest factor is taxes.

  8. Cost model compares alternatives based on a 10 year NPC Production starting in year 3 Ramp with “current generation” technology products and transition to next gen products after 5 years What factors drive analysis ? Cost differences driven by tax treatment, capital grants, other local factors Other local factors: utilities, labor, logistics Wafer FAB Cost Model: Key Assumptions & Drivers Percentage of 10 year NPC 100% Tax Tax Benefit Capital Grant 80% Op Costs Labor Benefit Op Costs Materials 60% Materials Labor Labor 40% Capital Capital 20% 0% US Int’l Conceptual 300mm FAB 10yr NPC Int’l $5.6B-$6.1B US $6.7B-$6.8B

  9. Comparative Taxes/Incentives

  10. Two thirds of new 300mm Fabs under construction, equipping, or in production are in Asia Source: Strategic Marketing Associates, May 2004

  11. Potential Gap-Closers • Rate Reduction • Full expensing of factory in year one • Investment Tax Credit • Others? Combinations? These solutions could be targeted to selected industries or broad-based

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