Hovensa refinery’s two parent companies are suing the territory for a combined $237 million in back taxes, in two civil suits filed in U.S. District Court on Dec. 29. Both Hess Oil Virgin Islands and PDVSA V.I. filed suit claiming their 50-percent share of income taxes are due in refunds.
Hovensa itself is not a party to the suits; just the V.I.-based parent companies, which are the local affiliates of parents Hess Oil and the Venezuelan state-owned oil company PDVSA.
PDVSA is seeking $153 million and HOVIC is seeking $84 million.
While the details and amounts of both suits differ slightly, both challenge the V.I. Internal Revenue Bureau’s decision to disallow the companies from retroactively deducting losses in the 2008 year from tax obligations for 2006 and 2007.
Hovensa’s owners are claiming large losses in 2008. But IRB asserts Hovensa underpaid 2008 taxes, disallowing a number of large deductions focused on a small number of extremely well-compensated employees. HOVIC and PDVSA dispute the legal basis and timeliness of IRB’s actions, saying, in part, that the statute of limitations expired on adjustments on 2008 returns before IRB rejected the deductions.
In its letter to Hovic explaining its rejection of adjustments to 2006 and 2007 returns based on 2008 losses, IRB says the company’s claim has been rejected because "a deficiency in tax – rather than a loss – exists for the tax period … therefore, there remains no loss to carryback" to 2006 and 2007.
The IRB finds a tax deficiency for 2008 because it disallowed tens of millions of dollars in deductions for that year. In one case, IRB disallowed deducting $3 million in salary for a single employee from its tax bill. According to PDVSA’s suit, IRB said one executive’s salary was "higher than the million-dollar limit by $1.927,027.93."
PDVSA counters that the million-dollar salary deduction cap only applies to publicly traded companies, not partnerships like that between family-owned Hess Oil and state-owned PDVSA.
The lawsuits were not unanticipated. Gov. John deJongh Jr. and administration officials warned of the possibility of a lawsuit, as one reason to pass legislation supporting a sales plan for the refinery that would have absolved Hovensa and its owners of potential liabilities and addressed the tax issues. The V.I. Legislature rejected the legislation supporting the sales plan, in session Dec. 19.
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When senators discussed the possibility of a lawsuit before voting down the legislative proposal, many senators expressed the view that the agreement did not remove all risk of a lawsuit and that the sales agreement the legislation would have supported did not protect the territory’s interests sufficiently.