owes Hawaii
$563 million,
study says

Two professors say the oil giant
fraudulently evaded taxes in an
Indonesian joint venture

How it worked

By Tim Ruel

ChevronTexaco owes the state more than $500 million for back taxes under a complex oil pricing scheme, including penalties and interest, according to an estimate by two accounting professors.

But the state would have to prove Chevron committed fraud, and some state officials say they are wary of pursuing the case.

"Fraud is very, very difficult to prove," said Earl Anzai, state attorney general. "Anything would interest us if we thought we had a good chance of winning."

The two professors, Jeffrey Gramlich and James Wheeler, recently went public with a report that says Chevron evaded $3.25 billion in state and federal taxes by paying inflated prices for crude oil through an Indonesian operation from 1970 to 2000.

Gramlich is a University of Hawaii professor, while Wheeler, a Lanikai resident, is retired from the University of Michigan.

Chevron has said the information contained in the report has already been reviewed and closed by the Internal Revenue Service. A Chevron spokesman declined comment Friday.

The IRS accepted a $675 million payment from Chevron to settle the case in 1994.

Based on a review of court documents and other records, the professors are pushing for renewed investigation, and have approached Hawaii and California officials about making their own cases against Chevron.

Hawaii could seek $563 million from Chevron for underpaid taxes since 1971, including penalties and interest, the professors said. The calculation is based on public federal records that show the amount of crude oil that Chevron imported into Hawaii from Indonesia between 1992 and July 2002. Records from earlier years were not available, so the professors used an assumption that Chevron has brought in similar amounts of oil from Indonesia since 1971.

The professors relied on a 1984 internal Chevron document, released to the IRS, that showed Chevron agreed to buy oil from its Indonesian joint venture, Caltex, at an average $4.55 a barrel higher than market price.

The professors also assumed that Chevron would be taxed at Hawaii's current top corporate income tax rate of 6.4 percent for the entire period of the analysis.

So far, neither Hawaii nor California appears to have jumped at the idea of opening an investigation.

The professors hope a state investigation would help advance their research into Chevron, since the IRS has settled the matter.

"California was initially, I think, quite interested, but along came all of their energy problems and everything else and I just think it got shoved aside," said Wheeler. A spokeswoman for the California attorney general's office declined comment.

Anzai said Hawaii officials would want to see another state pursue the case before jumping into an investigation. "We're a small state -- who's going to front all these costs?"

The state has a deadline of three years to go after tax claims, unless fraud is involved, said Marie Okamura, state tax director. The only way the state could seek $563 million from Chevron -- as estimated by the professors -- would be to raise fraud as an allegation, which increases the potential tax liability.

But fraud is difficult to prove, because the state has to explain, in very simple terms, that a company or person intended to evade taxes, said Kurt Kawafuchi, head of the Tax Division in the Attorney General's Office.

"You have to prove something that will look obvious to the average person on the street, that this person is concealing income," he said.

Kawafuchi noted he cannot comment on any specific tax case. In general, the more complex a tax scheme is, the harder it becomes to convince a judge and a jury that fraud is involved, Kawafuchi said.

The professors say Chevron bought oil at high prices from Caltex as a way of reducing U.S. tax liability. A fraud case that involves pricing is especially difficult, because the taxpayer could give several reasons for setting prices at a given level, Kawafuchi said.

"Clever tax planning doesn't mean it's tax fraud," he added.

Wheeler, one of the authors of the report, said he's convinced a case can be made for fraud, and that the evidence is in documents kept under seal by the IRS.

"Jim and I stand behind this estimate. We wouldn't release it if we didn't," said Gramlich, the other author of the report.

Gov. Ben Cayetano hasn't had a chance to look at the matter closely and plans to review it, a spokeswoman said.

"The governor feels this warrants further action," Cayetano spokeswoman Jackie Kido said in a prepared statement. "He had been wondering why the federal government backed off on its investigation, and suspects that it may not be the legal issues involved, but rather foreign policy considerations. The state now intends to seek from the IRS and the Justice Department any legal findings or settlement documents. Since it involves foreign law, the governor will be asking our university law school to take a look at these."

Does the governor feel he's jumping into something big, given that Dec. 2 is his last day in office?

"At this point he's not committing the state, but at the same time he's not walking from it either," Kido said.

Four years ago, shortly before Cayetano won re-election as governor, the state sued Chevron and Hawaii's major oil companies over allegations of price fixing and fraudulent concealment. The state settled the case for $35 million, less than 2 percent of the $2 billion it was seeking. However, documents uncovered in the state's investigation helped push the Legislature this year to pass an unprecedented law to regulate gas prices.


How it worked

Chevron and Texaco's plan to evade U.S. taxes through a foreign joint venture, according to a study:

>> Prior to merging, Chevron and Texaco both owned 50 percent of the joint venture Caltex, which produces oil in Indonesia.

>> 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.

>> Spending more for the oil allows Chevron to overstate deductions on its U.S. income tax returns.

>> Overpriced oil inflates earnings for Caltex, which are taxed at 56 percent by the government of Indonesia.

>> U.S. provides a dollar-for-dollar tax credit on the Indonesian taxes.

>> 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.

>> 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.

E-mail to Business Editor


Text Site Directory:
[News] [Business] [Features] [Sports] [Editorial] [Do It Electric!]
[Classified Ads] [Search] [Subscribe] [Info] [Letter to Editor]
© 2002 Honolulu Star-Bulletin --