How Chevron and Texaco Structured Transactions to Avoid Billions in U.S. Taxes

Posted: 16 Aug 2003

See all articles by Jeffrey Gramlich

Jeffrey Gramlich

Carson College of Business

James E. Wheeler

University of Michigan at Ann Arbor - Accounting

Abstract

This article explains the transactions, agreements, and accounting that Chevron, Texaco, and the government of Indonesia used to structure transactions that may have avoided billions of dollars in U.S. income taxes. Although ChevronTexaco became a merged entity on October 9, 2001, for many years Chevron and Texaco operated as separate corporations, with each owning 50 percent of a group of primarily non-U.S. companies collectively known as Caltex. Gramlich and Wheeler argue that transactions were structured so that Chevron and Texaco subsidiaries paid Caltex excessive prices for Indonesian crude oil, leading to excessive dividend income (with foreign tax credits) and cost of sales deductions on U.S. income tax returns. They find that when one of the equal shareholders purchased more overpriced oil than the other, Caltex paid monthly special dividends to the overlifter that could be construed as cost rebates, not dividends. To compensate for the extra taxes it received, the government of Indonesia provided Caltex with oil in excess of the amount called for under the formal production-sharing contract (PSC).

The authors estimate that this arrangement may have allowed Chevron and Texaco together to annually avoid paying some $220 million in federal income taxes and $11.1 million in state income taxes from 1964 to 2002. These estimates produce total federal and state taxes avoided of $8.6 billion and $433 million, respectively, for the combined company, ChevronTexaco.

Suggested Citation

Gramlich, Jeffrey and Wheeler, James E., How Chevron and Texaco Structured Transactions to Avoid Billions in U.S. Taxes. Available at SSRN: https://ssrn.com/abstract=436286

Jeffrey Gramlich

Carson College of Business ( email )

Wilson Rd.
College of Business
Pullman, WA 99164
United States

HOME PAGE: http://https://business.wsu.edu/research-faculty/institutes/hoops-institute/

James E. Wheeler (Contact Author)

University of Michigan at Ann Arbor - Accounting ( email )

701 Tappan Street
Ann Arbor, MI 48109-1234
United States
(734) 764-2322 (Phone)

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