Press Release: ChevronTexaco responses to tax allegation

Background

Prior to the merger of the companies in 2001, Chevron and Texaco each owned 50 percent of Caltex Pacific Indonesia, a joint venture formed to explore for and produce oil in Indonesia. (CPI is now a wholly owned subsidiary of ChevronTexaco.)

Issues

Pricing of crude oil is a highly complex issue, and is routinely audited by the Internal Revenue Service. In the course of these regular examinations, the IRS examined crude oil sales by CPI to Chevron and Texaco. The issues in question were whether the companies saved taxes by improperly pricing Indonesian crude, and whether Chevron and Texaco could claim a foreign tax credit for its share of the taxes paid to the Indonesian government by CPI on the sale of the crude oil.

In 1994, after a thorough review, Chevron and the San Francisco IRS examination team resolved all of these issues. Texaco also resolved all of its comparable issues with its IRS examination team, also in the 1990s. In a technical advice memorandum issued by the IRS National Office, it was determined that the Indonesian taxes were creditable.

These determinations on pricing and creditability were made by the IRS after an exhaustive review of all the facts.

In early Sept., 2002, two members of the faculty of University of Michigan's business school released a draft of a report alleging that Chevron and Texaco committed fraud through these practices, and calling on the IRS to reopen an investigation.

We have carefully reviewed this draft report, and conclude that it contains no new information. The very same arguments were published in the tax press in 1999, in which one of the authors of the report called for an investigation by the government and the government took no action at that time to change its position.

In fact, when one of the authors called for an investigation in 1999, the complaint was forwarded to the Treasury Inspector General's office -- which is standard procedure -- to consider whether the matter should be reopened. No action was ever taken following that review.

The authors of the report assert that the case should be opened on the basis of fraud. 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. Thus, we believe there is no basis to reopen the case.

The authors also allege that Chevron refused to provide the IRS with documents related to this matter. In fact, the company voluntarily provided 15,000 pages of documents in response to IRS requests. Some of these documents were referred to in the professors' report. The court dispute involved the IRS's request for documents involving legal analysis that Chevron believed were not subject to disclosure under the attorney-client privilege. Ultimately, this disclosure dispute was settled.

We are surprised that these issues are being raised again because they are not new, have been rigorously reviewed by the government and are without merit.

All companies of our size are routinely audited by the Internal Revenue Service every year, and the issues the report raises already have been raised before, fully examined, resolved and closed.

ChevronTexaco takes great pride in the integrity, transparency and credibility of its financial practices and reporting, adhering to the highest standards. Those who consider investing in ChevronTexaco stock have come to expect nothing less, and we always strive to meet their expectations. (*)

Source: ChevronTexaco