The Justice Department said Friday that British Petroleum has agreed to pay a record-breaking $18.7 billion settlement to resolve claims related to the Deepwater Horizon oil spill in the Gulf of Mexico in 2010, but advocacy groups are warning that the settlement is largely tax deductible for BP.
The oil giant is likely to write off $13.2 billion as an ordinary business cost. “A judge had declared the oil spill was the result of gross negligence,” said Phineas Baxandall, senior analyst for tax and budget policy at the U.S. Public Interest Research Group. “It is outrageous for BP to treat any portion of these payments as an ordinary business expense. We call on the company to promise that it will not write these payments off as tax deductions. We also call on the Justice Department to make public the full language of the settlement on its website.”
Settlements are often posted alongside press releases on the Department of Justice website, but the DOJ failed to do this on its
Only $5.5 billion is indicated explicitly as a penalty under the Clean Water Act. The federal government could have received as much as a $13.7 billion penalty under that Act based on a recent finding by a New Orleans judge that the spill was the result of “gross negligence.” Penalties are not tax deductible by law, as opposed to ordinary business compensation or restitution, but 80 percent of the sum is also indicated as heading to states for restoration efforts, which could allow BP to treat it as deductible, unless the settlement language forbids it.
In addition, the group noted that $13.2 billion of the settlement is not categorized as a penalty, indicating that it will almost certainly become a tax deduction, unless the settlement explicitly forbids it. If so, this non-penalty portion of the settlement will have an after-tax value of only $8.58 billion, and the whole deal would be worth only $14.08 billion to the public.
The Justice Department fact sheet indicates that the $8.1 billion earmarked for natural resource damages “includes $1 billion already committed for early restoration,” thus indicating a billion dollars of today’s announcement is actually just repackaging an earlier concession by the company.
Because the payments will be made over 18 years, the real value of later payments will have significantly eroded. Depending on inflation, the value of a billion dollars paid 18 years from now will be far less than a billion dollar payment today.
A bipartisan bill in Congress, t
Some agencies, such as the Consumer Financial Protection Bureau, promptly post all their settlements online and are very explicit about forbidding payments to be tax deductible, thr group pointed out. Since 2013, standard practice at the Environmental Protection Agency has been to make explicit in their settlements that agreed costs of undergoing future clean up or paying into clean up funds are also non-deductible.
“Americans expect that when companies pay settlements for terrible acts like oil spills or mortgage scams, it is to atone for their misdeeds and to discourage future violations of public law,” said Baxandall. “It sends the wrong message to allow payments for misdeeds to be a tax write off. Moreover, every dollar that BP receives as a tax windfall for deducting this settlement will be a dollar that ordinary taxpayers will need to shoulder in the form of more national debt, higher tax rates or cuts to public programs. Allowing this settlement to be a tax write-off subsidizes bad behavior.”
U.S. PIRG’s research report on settlement deductions is
