[ OUR OPINION ]
OBSCENE profits by the oil industry in Hawaii have been largely attributed to price-gouging by what the industry's attorney acknowledged to be an oligopoly. A new research paper by two accounting professors suggests that those profits may have been helped along by Chevron's evasion of $3.25 billion in state and federal taxes from 1970 to 2000. The complex petroleum pricing scheme involved a project in Indonesia, where Hawaii gets more than 30 percent of its crude oil. Further federal and perhaps state investigations of the alleged tax fraud are warranted. Tax probe warranted
for ChevronTexaco
THE ISSUE Two accounting professors have alleged that Chevron and Texaco evaded federal and state taxes through a complex oil-pricing scheme in Indonesia.
The Internal Revenue Service investigated the scheme in the early 1990s, and the company paid a $675 million settlement covering the years 1979 through 1987. The IRS's district office in San Francisco, where Chevron was based, continued its investigation but the agency's Washington office closed the case. Chevron and Texaco merged into ChevronTexaco last October.
Although Chevron fought efforts by the IRS to obtain internal documents, hundreds of documents were entered into the public record. Jeffrey Gramlich, a University of Hawaii tax and accounting professor, says information contained in those documents should prompt a reopening of the probe.
"What we believe is that the evidence is there that fraud exists," Gramlich told The New York Times. "The national office of the IRS settled for far less -- something like a quarter on the dollar -- than what is really owed."
In response, a spokesman for ChevronTexaco said, "There's absolutely nothing new here. All of those issues they've raised are without merit."
According to the research by Gramlich and James E. Wheeler, professor emeritus of accounting at the University of Michigan, where Gramlich is currently a visiting professor, the scheme involved Caltex, a joint venture of Chevron and Texaco before their merger. Caltex produces crude oil in a project with an Indonesian government oil company.
According to a 1984 internal Chevron document cited by the authors, Chevron agreed to buy oil from Caltex at prices that the government of Indonesia set at an average $4.55 a barrel higher than the prevailing market price. Caltex had to pay a 56 percent income tax to Indonesia on its inflated income, but it was able to claim a dollar-for-dollar deduction from its U.S. income taxes. The scheme was made profitable by Indonesia compensating Caltex with additional free oil.
For example, Caltex allegedly would sell Chevron and Texaco $227 worth of oil and pay Indonesia $127 in taxes. Indonesia then would give Caltex $100 worth of free oil that was not taxed in the United States. Chevron and Texaco got U.S. tax credits for the $127 that Caltex had paid to Indonesia.
Basically, according to the report, the oil companies were able to deduct the Indonesian tax payments from their U.S. taxes while being compensated by Indonesia in the form of free oil. If so, Hawaii and the federal government should be owed back taxes.
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