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BP's $10B Credit for Gulf Oil Spill Loss

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By Dian L. Chu, Economic Forecasts & Opinions


There is no shortage of news from BP on Tuesday:


The oil major reported its first quarterly loss--$17.15 billion--in eighteen years, and will sell about $30 billion in assets.

The company also announced that CEO Tony Hayward will step down on Oct. 1 to work at TNK-BP--BP’s joint venture in Russia.

Bob Dudley, an American BP executive, will succeed Hayward as the new Chief Executive

The more eyebrow-raising news; however, is that BP plans to claim almost $10 billion in U.S. tax credit as a direct result of the Gulf oil spill. Here is how the tax code and math work.


Under the U.S. corporate tax law, companies can take credits up to 35% of their loss. Since BP reported $32.2 billion charge related to the cost of the spill, 35% of that will give you roughly $10 billion in credit. So BP’s claim is pretty much what its spokesman said.



"This is the accounting process, we are going by U.S. laws.”


The intention of the tax code is to encourage investments and to help companies even out profit and loss, along with the associated taxes. Lawmakers just forgot to incorporate a rider clause for public safety and/or environmental damage related expense.


The tax credit, if claimed, could mean $10 billion of the Gulf aftermath costs would come out of taxpayers’ pocket. This could potentially be quite an embarrassment for the Administration as President Obama vowed that BP will "pay every dime owed" for the spill damage.


Of course, BP could conceivably “do the right thing” and drop its tax credit claim to avoid a crashing tsunami of public anger and outrage. However, don’t expect BP to give up on this sizable cost offset that easily, since BP has made considerable concessions such as a voluntary $20 billion oil spill fund, and speculation of U.S. government’s involvement in Hayward’s dismissal and Dudley's appointment.


As reputation goes, it is hard to imagine the IRS would let this $10 billion slip by. Could revenge of the IRS be in the cards, or as Leona Helmsley famously said “Only the little people pay taxes”?


Dian L. Chu, July 27, 2010



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