Today the U.S. Department of Justice announced a proposed $20.8 billion out-of-court settlement with BP to resolve charges related to the Gulf Oil spill. The settlement would allow 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. Only $5.5 billion is explicitly labeled a non-tax-deductible Clean Water Act penalty. This proposed settlement would allow BP to claim $5.35 billion as a tax deduction, 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, but unless the DOJ explicitly prohibits a write-off, the vast majority of what BP pays for their gross negligence will legally be considered business as usual under the tax code,” said Sean Foran, New Mexico Public Interest Research Group (NMPIRG) Director. “This not only sends the wrong message, but it also hurts taxpayers by forcing us to shoulder the burden of BP’s tax deduction 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 interpret 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 Foran.
BP has already written off the cost of its $32 billion cleanup effort after the spill, earning a tax credit 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.
NMPIRG 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 NMPIRG’s research report on settlement deductions here (link).