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GRASPING AT STRAWS: V.I. Gov’t Also Sued PDVSA For $3.8 Billion in August

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                     Gov. Kenneth Mapp

CHRISTIANSTED – When the Virgin Islands slapped Hess. Corp. with a $1.5 billion suit last month accusing the oil company of shuttering a refinery it had promised to run through 2022, it didn’t also mention that it had already sued PDVSA for $3.8 billion the month before.

In August, the V.I. Bureau of Internal Revenue (BIR) argued that Hess’ partner for the HOVENSA refinery, Venezuela’s state-owned Petroleos de Venezuela SA (PDVSA), should pay nearly $3.8 billion in taxes and penalties and said those claims shouldn’t be disallowed as untimely.

A Virgin Islands subsidiary of Petróleos de Venezuela SA in March challenged deficiencies of nearly $3.8 billion in taxes and penalties from the company’s joint venture with a V.I. subsidiary of Hess Corp. in a court in the territory.

The V.I. Bureau of Internal Revenue disallowed more than $12 billion in deductions by HOVENSA LLC, a 50-50 joint venture by PDVSA VI Inc. and Hess Oil Virgin Islands Corp., resulting in $6.1 billion in flow-through income that the tax authority alleges was not reported by PDVSA on its 2010 tax return, according to court documents.

PDVSA, the Venezuelan state-owned oil and gas company, said in its complaint that the BIR did not timely notify PDVSA of the deficiency and the company did not have any taxable income on which to assert the taxes and penalties. PDVSA properly reported income and losses from its stake in HOVENSA, the complaint said.

“Respondent has not identified the nature of the tax surcharge it is asserting, provided any legal or factual support for the tax surcharge, or explained how it determined the amount of the tax surcharge,” PDVSA said.

In 2011, PDVSA filed a tax return for the previous year claiming a loss of nearly $239 million, according to the complaint. According to a notice of deficiency from the V.I. Bureau of Internal Revenue included with the complaint, the tax authority alleged that the company did not report $6.1 billion in flow-through income from HOVENSA and that it owed $2.4 billion in taxes along with $1.4 billion in penalties.

According to a final partnership administrative adjustment attached to the complaint, the BIR disallowed nearly $12 billion in HOVENSA’s cost of goods sold deductions, along with hundreds of millions of dollars in depreciation and other deductions.

HOVENSA is challenging the adjustment in a separate case in the U.S. District Court of the Virgin Islands. PDVSA reported a loss of $239 million from HOVENSA in 2010, according to the complaint.

PDVSA’s notice of deficiency is dated December 30, 2014 but the company claims that it never received the notice in the mail because it was not sent to the address on the company’s returns as required under the Tax Code.

PDVSA did not receive the notice until March 4, 2015 after it was emailed to counsel, the complaint said. The company also said the Virgin Islands tax authority erred in disallowing $1,000 in legal and professional expenses and recapturing $120,000 in rental income, according to the complaint.

The V.I. government’s most recent complaint filed in Superior Court September 13 accused the oil and natural gas company of committing “serious violations of the law” in closing what was the Caribbean’s largest refinery and sought at least $1.5 billion in damages.

At a press conference in mid September, Gov. Kenneth Mapp said Hess’ decision to close the HOVENSA refinery in St. Croix in 2012 was a failure to live up to its obligations to the people of the territory.

“While Hess Oil bleeded the HOVENSA refinery of cash, through management fees, and had planned and clearly orchestrated its closure long before 2012, it made the decision it no longer wanted to be in the refining business and showed it didn’t give a hoot about its obligations to the people of this territory,” Mapp said. “That is not acceptable.”

Mapp said they are following the lead of several U.S. states that have successfully pursued litigation against private companies receiving tax breaks or other incentives but failed to live up to their end of the bargain.

“Without any notice, Mr. John Hess, then chairman, contacted [former Virgin Islands governor John de Jongh] that the refinery was closing and the plant would be shuttered,” Mapp said. “Hess doesn’t get to do that, simply by its whim.”

September’s lawsuit is the latest salvo in an ongoing legal battle between the territory and Hess, which has operated on the island since 1965 and has been responsible for a large chunk of the islands’ economy.

Meanwhile, Hess had been pursuing an $84 million tax refund suit against the territory since December 2014, but the case was tossed by a New York federal judge in July. U.S. District Judge J. Paul Oetken ruled that the Virgin Islands do not qualify as being a part of the United States in light of its “unique” tax structure.

Hess Oil has been fighting with the V.I. government over taxes for several months. In March, Hess Oil petitioned the court for review of the 2010 FPAA issued to HOVENSA.

Hess Oil Virgin Islands Corp. (HOVIC) sued the Virgin Islands’ Bureau of Internal Revenue in federal court June 11, claiming the agency falsely inflated the taxable income of an affiliate and wrongly reduced or disallowed expenses and deductions totaling nearly $1.5 billion in the 2009 tax year.

Acting as the tax matters partner for Hovensa LLC — a 50/50 joint venture between Hess Virgin Islands Corp. and Petróleos de Venezuela SA VI Inc., the Venezuelan state-owned oil and gas company — Hess Oil VI argued that the Bureau of Internal Revenue made numerous errors in a final partnership administrative adjustment it issued to HOVENSA for the 2009 tax year.

Hess Oil VI outlines a litany of errors in the FPAA in the suit, including that the agency arbitrarily reduced HOVENSA’s costs of goods sold, like raw materials, supplies and labor, by more than $1.3 billion.

According to Hess, the V.I. tax bureau first reduced the amount by more than $600 million after determining that HOVENSA had not actually purchased certain inventory. Then the bureau slashed the figure again by an additional $688 million based on an unsupported assumption that the company had claimed “double deductions” by including the amount as both operating expenses and in the costs of goods sold, according to the complaint.

“The FPAA adjustments to HOVENSA’s cost of goods sold are incorrect,” Hess Oil VI says. “They are not supported by the evidence. They are also inconsistent with Hovensa’s audited financial statements.”

Other errors made on the FPAA include disallowing depreciation expenses related to its St. Croix refinery of more than $33 million, and disallowing all of HOVENSA’s depreciation deduction for alternative minimum tax purposes by nearly $98 million, according to the suit.

Other deductions totaling nearly $5 million were also erroneously disallowed after the bureau determined they were unsubstantiated, duplicated and unallowable, Hess said.

The V.I. tax bureau also wrongly increased HOVENSA’s 2009 income by $3.3 million by disallowing a certain adjustment, which Hess Oil says should have been allowed as an increase in HOVENSA’s cost of goods sold, resulting in a decrease of the company’s 2009 taxable income.

HOVIC is asking the court to determine that the FPAA is erroneous and invalid, and to reduce HOVENSA’s taxable income. HOVENSA was established in 1998 to own and operate a refinery in St. Croix, but from 2008 to 2011, the company incurred losses of more than $1 billion, and it shuttered the refinery in 2012.

PDVSA VI Inc. is represented by Chad C. Messier of Dudley Topper & Feuerzeig LLP.

Representation information for the Virgin Islands Bureau of Internal Revenue was not immediately available Sunday.

The $3.8 billion case is PDVSA VI Inc. v. Director, Virgin Islands Bureau of Internal Revenue, case number 3:15-cv-00029, in the District Court of the Virgin Islands.

The Virgin Islands is represented by Cohen Milstein Sellers & Toll PLLC.

Counsel information for Hess was not immediately available.

The case where Hess Corp. is suing the territorial government is HOVENSA, LLC v. Director, Virgin Islands Bureau of Internal Revenue, case number 3:15-cv-00049 in the U.S. District Court of the Virgin Islands.

The $1.5 billion case is U.S. Virgin Islands v. Hess Corp., case number SX-15-cv-358, in the Superior Court of the Virgin Islands.

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The Author

John McCarthy

John McCarthy

John McCarthy is primarily known for his investigative reporting on the U.S. Virgin Islands. A series of reports beginning in the 1990's revealed that there was everything from coliform bacteria to Cryptosporidium in locally-bottled St. Croix drinking water, according to a then-unpublished University of the Virgin Islands sampling. Another report, following Hurricane Hugo in 1989, cited a Federal Emergency Management Agency (FEMA) confidential overview that said that over 40 percent of the U.S. Virgin Islands public lives below the poverty line. The Virgin Islands Free Press is the only Caribbean news source to regularly incorporate the findings of U.S. Freedom of Information Act requests. John's articles have appeared in the BVI Beacon, St. Croix Avis, San Juan Star and Virgin Islands Daily News. He is the former news director of WSVI-TV Channel 8 on St. Croix.

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