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Unlike earlier settlements from the Gulf Oil spill, the settlement the U.S. Justice Department negotiated with BP stipulated that none of the billion penalties paid are tax-deductible, according to Lanny Breuer, head of the Dept. of Justice's criminal division.
“This is great news. In the past, federal agencies have touted big settlement numbers and corporate wrongdoers claimed to have paid their debt to society, but taxpayers quietly lost out as they ended up picking up much of the tab,” said Phineas Baxandall, the Senior Tax and Budget Policy Analyst at the U.S. Public Interest Research Group (U.S. PIRG). “The Department of Justice deserves a lot of credit for negotiating hard on an issue that it may get little credit for,” he added.
According to earlier news accounts, BP said it would increase its existing $38.1 billion charge against earnings for the spill by $3.85 billion. The company had already written off almost $10 billion of Gulf spill costs as tax deductions. If the company had been able to treat the entire new amount as a tax-deductible business cost, then the oil and gas giant could have reduced its future tax bills by over $1.3 billion – a tax benefit that would ultimately be borne by other taxpayers.
“For taxpayers, the BP settlement is $1.3 billion better than it looks,” said Baxandall.
At issue was whether, by agreeing to a settlement, lawyers for BP could then claim that the settlement was not punitive, even though it is clearly for wrongdoing that brought criminal charges.
Unless the Department of Justice clearly spells out that settlements cannot be deducted, companies that pay these fines and penalties typically deduct them like ordinary business expenses.
Companies that pay settlements often deduct the payments even when rules suggest they should not, according to a study by the Government Accountability Office. Agencies often do not see it as their job to deal with tax issues and the IRS usually throws up its hands, saying they can’t interpret the intent of agencies.
BP is expected to pay billions more in a future settlement related to violations of the Clean Water Act and other environmental laws.
“Whether or not the upcoming environmental settlement will also be free of hidden tax giveaways will depend on whether federal negotiators press hard to protect taxpayers like they did this time,” added Baxandall. “
When a company negotiates a tax-deductible settlement for its misdeeds, the public loses four times over. First, the public suffers the direct impact of corporate wrongdoing. Second, taxpayers are forced to shoulder part of the amount of the penalty because the public must cover the forgone revenue by raising tax rates, cutting public programs, or adding to the national debt. Third, future deterrence of corporate wrongdoing is weakened. And fourth, the absence of a trial eliminates opportunities for a public airing of evidence about corporate misdeeds and the lax regulations that can enable them.
A 2012 report by U.S. PIRG on the tax deductibility of costs from corporate wrongdoing can be found here.
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