The recent announcement by the U.S. Department of Justice of a proposed USD 20.8 billion out-of-court settlement with BP to resolve charges related to the 2010 Deepwater Horizon oil spill allows the corporation to write off USD 15.3 billion of the total payment as an ordinary cost of doing business tax deduction, according to the U.S. Public Research Interest Group (U.S. PIRG).
The majority of the settlement is comprised of tax deductible natural resource damages payments, restoration, and reimbursement to government, with just USD 5.5 billion explicitly labeled a non-tax-deductible Clean Water Act penalty, U.S. PIRG says.
This proposed settlement would allow BP to claim an estimated USD 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 explicitly prohibits a write-off,” said Michelle Surka, program associate with U.S. PIRG.
“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 denying deductions for this portion, BP could have interpreted that portion of the penalty as tax deductible restitution and compensation, PIRG says.
“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 USD 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 USD 32 billion cleanup effort after the spill, earning a tax windfall of USD 10 billion.
Federal agencies did not attempt to prevent this giveback through the tax system, PIRG says. 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 USD 4 billion criminal settlement specified that it was not tax-deductible.
Along with the agreement with the Department of Justice, BP has also come to settlement agreements with the five Gulf states, worth USD 5.9 billion in total.