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Today’s announcement by the U.S. Department of Justice of a proposed $20.8 billion out-of-court settlement with BP to resolve charges related to the Gulf Oil spill allows the corporation to write off $15.3 billion of the total payment as an ordinary cost of doing business tax deduction. The majority of the settlement is comprised of tax deductible natural resource damages payments, restoration, and reimbursement to government, with just $5.5 billion explicitly labeled a non-tax-deductible Clean Water Act penalty. This proposed settlement would allow BP to claim an estimated $5.35 billion as a tax windfall, significantly decreasing the public value of the agreement, and nearly offsetting the cost of the non-deductible penalty.
“BP was found to be grossly negligent in the Deepwater Horizon case, and yet the vast majority of what they are paying to make up for their gross negligence is legally considered just business as usual under the tax code unless the DOJ explictly prohibits a write-off,” said Michelle Surka, program associate with US Public Interest Research Group. “This not only sends the wrong message, but it also hurts taxpayers by forcing us to shoulder the burden of BP’s tax windfall in the form of higher taxes, cuts to public programs, and more national debt.”
Under U.S. tax code, restitution, reimbursement, and compensatory payments made to damaged parties in a settlement can be claimed as ordinary cost of doing business tax deductions unless otherwise stated in the agreement. Penalties, by contrast, are almost always considered tax deductible. In this proposed consent decree, the 80% of the civil penalty portion of the payment is, as per the RESTORE Act, to be spent on “environmental restoration, economic recovery projects, and tourism and seafood promotion in the five Gulf states”. If the Department of Justice had not been explicit about deny deductions for this portion, BP could have interpreted that portion of the penalty as tax deductible restitution and compensation.
“Being explicit about denying deductions for the Clean Water Act penalty is certainly a step in the right direction, but it’s a small one considering that the remaining $15.3 billion is wide open for deductions. The Department of Justice should go farther and make sure that the entirety of the settlement is non-deductible, regardless of how the money is spent.” said Surka.
BP has already written off the cost of its $32 billion cleanup effort after the spill, earning a tax windfall of $10 billion. Federal agencies did not attempt to prevent this giveback through the tax system. By contrast, the Department of Justice reached a criminal settlement with BP over its role in the deaths of 11 workers who were aboard the oil rig when it exploded. That $4 billion criminal settlement specified that it was not tax-deductible.
Separately from today's announcement, BP has also come to settlement agreements with the five Gulf states, worth $5.9 billion in total. It is not known how much, if any, of those settlements will be tax deductible.
U.S. PIRG has called on the Department of Justice to deny tax deductions for BP’s misconduct in the past. The proposed consent decree is now open to public comment for two months, and after that period the involved parties will decide whether to seek court approval of the consent decree.
You can read U.S. PIRG’s research report on settlement deductions here (link).
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