Taxing report

A study written by 2 Hawaii
professors says ChevronTexaco
evaded billions in taxes

State should investigate
ChevronTexaco, authors say

How it worked

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By Tim Ruel
truel@starbulletin.com

The authors of a new report that says ChevronTexaco avoided more than $3 billion in state and federal taxes want the state of Hawaii to help expand their investigation of the company.

STAR-BULLETIN FILE Chevron and Texaco used an elaborate plan to evade state and federal taxes, according to a new study.

"We're only seeing part of it," said James Wheeler, a Lanikai resident who co-wrote the report and who has taught accounting at the University of Hawaii.

Wheeler and colleague Jeffrey Gramlich went public with their report last week in the New York Times and the San Francisco Chronicle. Gramlich is a University of Hawaii accounting professor who is currently a visiting professor at the University of Michigan Business School.

The authors said they want the state to open a case against ChevronTexaco for underpaying taxes through deals with a subsidiary operating in Indonesia. As part of their research, they were unable to find information that shows Hawaii's potential tax liability. But the state can get that information by issuing a subpoena for documents from the federal case, the authors said.

"We do know this: Hawaii gets a lot of crude oil from Indonesia," said Wheeler.

Between 1990 and 1997, nearly 36 percent of Hawaii's imported crude oil came from Indonesia, according to a state report.

The authors said they hope to use any documents uncovered by the state to further their research.

The authors also want the Internal Revenue Service to look at the tax case again, but they think Hawaii may have a better shot, since the state was not part of a settlement that Chevron reached with the federal government in 1994.

Chevron paid $675 million to settle an IRS audit, but the settlement only covers taxes from the years 1979 through 1987. The new report is based on tax liability from the years 1970 through 2000, and the professors say the uncovered years open the door for the IRS to take another look at the case. The IRS could also look at a case again if the government finds fraud may have been involved, the authors said.

The state Attorney General's Office declined comment. An IRS spokeswoman declined comment.

ChevronTexaco said Chevron and Texaco resolved the matter with the IRS in the 1990s, before their 2001 merger. ChevronTexaco posted a response to the report on its Web site, saying, "We have carefully reviewed this draft report, and conclude that it contains no new information ... To reopen a case for fraud, there must be new facts that were not before the IRS when they considered the case. All of the facts on which the accounting professors rely for their analysis were known to the IRS during the audit."

BLOOMBERG NEWS Prior to merging in 2001, Texaco and Chevron ran a joint venture in Indonesia, Caltex. The companies used Caltex to dodge state and federal taxes, a new study claims.

ChevronTexaco's response did not address the possibility of a state inquiry.

The state has already sued Chevron and Texaco -- as well as five other oil companies -- over charges of antitrust and fraudulent concealment. The state settled the case for $35 million, a small fraction of the $2 billion it was seeking. Chevron and Texaco each contributed $5 million to the settlement.

The University of Hawaii School of Accountancy, which helped finance the tax research paper, is proud of Wheeler and Gramlich's work, said Hamid Pourjalali, school director. The university contributed $1,000 to help the researchers build a database of information. It also allowed Gramlich to cut back on his class time to do the research.

"This is good. This is the type of research that is valuable to people in Hawaii and elsewhere," Pourjalali said.

He noted that the authors' report is likely to gain extra notoriety in light of recent corporate accounting scandals.

"Their timing was good," Pourjalali said.

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How it worked Chevron and Texaco's plan to evade U.S. taxes through a foreign joint venture, according to a new study: 1 >> Prior to merging, Chevron and Texaco both owned 50 percent of the joint venture Caltex, which produces oil in Indonesia. 2 >> Chevron agrees to buy oil from Caltex at inflated prices set by the government of Indonesia, more than $4.50 a barrel higher than market conditions. 3 >> Spending more for the oil allows Chevron to overstate deductions on its U.S. income tax returns. 4 >> Overpriced oil inflates earnings for Caltex, which are taxed at 56 percent by Indonesia. 5 >> U.S. provides a dollar-for-dollar tax credit on the Indonesian taxes. 6 >> The Indonesian government reimburses Caltex for its taxes in free oil, including enough to cover the 56 percent tax, also levied on the free oil. 7 >> The amount left is not taxed in the United States, plus Chevron and Texaco receive a U.S. tax credit for Indonesian taxes on the free oil. On the Net: The records used for the study are online at www2.Hawaii.edu/~gramlich/caltex/home.html.