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IRS Questions Intel's Books

Intel may be paying the IRS piper to the tune of $600 million plus interest, according to its latest Form 10-Q filing with the SEC on Wednesday.

The required financial statement noted that the IRS proposed an adjustment to Intel's 1999 and 2000 tax returns. A notice, received by Intel on August 4, said the IRS wanted to cut the tax benefit on export sales taken by the Santa Clara, Calif.-based chip-making giant.

Intel spokesperson Chuck Mulloy told InternetNews.com that the question came up as part of a routine audit. "It's over what constitutes manufacturing," he said. "We get tax benefits for manufacturing products in the U.S. and exporting them," he said.

Intel manufactures chips in sheets using factories in the U.S. The sheets are die cut into single chips, tested and packaged at Intel factories in Costa Rica, the Philippines, Malaysia and China. "[In the overseas labs,] they don't create any circuits or modify the product," Mulloy said. "We're saying the value is added in the wafer manufacturing process itself."

Intel has claimed the tax credit since 1991, and the IRS took similar issue with its 1991 through 1993 tax filings, according to Mulloy. "We went through the process, and the result was that we got the tax benefit. We've been operating under that decision since."

Mulloy said that the only difference in Intel's manufacturing process between 1991 and the present is the addition of the plants in China and Costa Rica.

If the auditors decide against Intel's reasoning, Intel warned in its 10-Q, it's likely the IRS will make similar claims for the subsequent tax years. The whole thing, Mulloy said, could take years.

On July 15, Intel reported second-quarter revenue of $6.8 billion, up 1 percent sequentially and up 8 percent year-over-year.