BP Can Write Off $15.3 Billion of Gulf Oil Spill Settlement

British Petroleum will be able to write off $15.3 billion of the $20.8 billion settlement of the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, according to an advocacy group.

Loretta Lynch

Monday’s announcement by the U.S. Department of Justice of a proposed out-of-court settlement with BP to resolve charges related to the Gulf oil spill will allow BP to write off $15.3 billion of the total payment as a tax deduction for the ordinary cost of doing business, according to the U.S. Public Interest Research Group.

The majority of the settlement comprises tax deductible natural resource damages payments, restoration, and reimbursement to government, with only $5.5 billion explicitly labeled a non-tax-deductible Clean Water Act penalty. Thw proposed settlement would allow BP to claim $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.

The Department of Justice announced the settlement Monday, saying the federal government was joining the five Gulf states to resolve civil claims against BP arising from the April 20, 2010 Macondo well blowout and the massive oil spill that followed in the Gulf of Mexico. The global settlement resolves the governments’ civil claims under the Clean Water Act and natural resources damage claims under the Oil Pollution Act, as well as economic damage claims of the five Gulf states and local governments.  Taken together, according to the DOJ, this global resolution of civil claims is worth $20.8 billion, and is the largest settlement with a single entity in the department’s history.

“Building on prior actions against BP and its subsidiaries by the Department of Justice, this historic resolution is a strong and fitting response to the worst environmental disaster in American history,” Attorney General Loretta Lynch said in a statement. “BP is receiving the punishment it deserves, while also providing critical compensation for the injuries it caused to the environment and the economy of the Gulf region. I am proud that the Department of Justice has helped lead the way from tragedy to opportunity, and I am confident that our actions today will help to ensure that Gulf communities emerge from this disaster stronger and more resilient than ever before.”

However, U.S. PIRG pointed out that under the 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, in contrast, are almost always considered tax deductible. In this proposed consent decree, the 80 percent 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, according to the group.

“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,” said Surka. “The Department of Justice should go further and make sure that the entirety of the settlement is non-deductible, regardless of how the money is spent.”

BP has already written off the cost of its $32 billion cleanup effort after the spill, earning a tax windfall of $10 billion, according to the group, and 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.

Along with the agreement with the Department of Justice, BP has also come to settlement agreements with the five Gulf states, worth $5.9 billion in total.

U.S. PIRG has called on the Department of Justice to deny tax deductions for BP’s misconduct in the past, including this July when BP agreed to an $18.7 billion settlement (see BP’s $18.7 Billion Settlement for Gulf Oil Spill Mostly Tax Deductible). 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.

U.S. PIRG’s 2013 research report on settlement deductions is available here.