Real Value of Deepwater Horizon Disaster Payments Depend on BP's Tax Deductions

As British Petroleum (BP) goes through the final phases of closing out its liabilities under the Clean Water Act, public understanding of the real value of the corporation's payments to address the damage caused by the Deepwater Horizon disaster must include the tax deductions BP has taken and will likely take by writing the payments off as ordinary costs of doing business.

In 2010, BP claimed a $32.2 billion charge for anticipated business losses in connection with the spill. This number includes $28 billion in cleanup costs and damages, $4 billion in Department of Justice criminal penalties, and $535 million in payments to the SEC. BP is still anticipating several billion more in Clean Water Act penalties and other regulatory penalties, as well as an anticipated $18 billion more in damages

"There are billions of dollars on the line here," said Michelle Surka, program associate with US Public Interest Research Group, "It should be completely explicit how much of its Deepwater Horizon payments BP can claim as a tax deductible business expense. If the public is ultimately footing the bill, the public should, at the very least, be informed."

Over 80 percent of the total money BP has paid in connection with the Gulf oil spill so far qualifies for tax deductions. Only the Department of Justice's $4 billion criminal fine and the SEC's $535 million penalty were explicitly non-deductible by law. Any Clean Water Act payments will likely be non-deductible, because they will qualify as legal penalties, and the EPA, unlike many agencies, tends to be explicit that such payments be regarded as penalties.

Federal tax law forbids fines and penalties to the government from being treated as tax deductions, but settlements negotiated with agencies often fail to spell out whether a payment is technically a penalty, and even some penalties can be deducted if companies can argue that they are not meant to be punitive.

Even after the current Clean Water Act charges are resolved, BP also has to settle its liabilities through the Natural Resources Damage Assessment (NRDA) process, which will likely cost the company several billion more dollars. Unlike the EPA, payments made under the NRDA process do not follow EPA processes, and have in the past been tax deductible. Therefore, any payment made through the NRDA process will likely have a significantly lowered value after taxes.

In 2011, BP claimed from $10 billion to $13 billion in tax credits and therefore paid no federal taxes that year. Because corporations aren't required to report the details of tax deductions they claim, and settlement agreements don't need to specify which payments will qualify for tax deductions, the public can't determine how much BP has already claimed and how much they might claim in future years. BP's total expenditure on addressing the Gulf oil spill has already exceeded the initial charges claimed in 2010, and thus BP will likely be able to file for additional tax credits.

You can also read U.S. PIRG's report on tax write-offs in settlements here: "Subsidizing Bad Behavior: How Corporate Legal Settlements for Harming the Public Become Lucrative Tax Write-Offs.