The US revenue service has proposed increasing Intel's tax liability by about $600 million (€527 million) following a regular review of the firm's returns in 1999 and 2000.

Intel received the notice from the Internal Revenue Service (IRS) on Monday and disclosed it in a regulatory filing yesterday.

It said the tax liability related to the benefit on export sales taken by Intel.

Intel, which employs more than 3,000 employees in the Republic, said it disputed the proposed adjustments and intended to pursue the matter through applicable IRS and judicial procedures, as deemed appropriate.

Intel said also in the filing that the IRS may make similar claims for years after 2000 in future audits.

Intel spokesman, Mr Chuck Mulloy, said the company had a similar dispute with the IRS in the early 1990s and the matter was resolved in Intel's favour until the latest routine audit.

"It's a new audit team, and they are revisiting this whole issue," he said.

"We plan to work our way through the normal process that the IRS has in place. We plan to prevail."

The process could take years, however.

The dispute centres on a tax credit that is intended to spur manufacturing for export.

The bulk of Intel's chip fabrication facilities are located in the US, but the chips are then sent overseas for testing and assembly.

IRS officials maintain that the work that takes place overseas constitutes manufacturing and makes Intel ineligible for the credit.

An Intel Ireland spokesman said this was not an Irish-based issue as it specifically concerning assembly and test of chips, and not wafer fabrication.

Mr Larry Wright, an IRS spokesman, declined to comment, citing taxpayer confidentiality.

Intel, the world's largest semiconductor company, noted that an unfavourable outcome of the case could possibly have a "material adverse impact on the results of operations of the period in which the matter is ultimately resolved".

The company, however, will not restate earnings.

Additional reporting AP