BP to cut U.S. tax bill by $10 billion because of losses in gulf spill

Blamed by many for the catastrophic Deepwater Horizon oil spill, it is believed that BP chief executive Tony Hayward will resign his post in October and take a job with the company's joint venture in Russia, TNK-BP.
By Jia Lynn Yang
Washington Post Staff Writer
Tuesday, July 27, 2010; 11:56 PM

BP said Tuesday that it plans to cut its U.S. tax bill by $9.9 billion, or about half the amount pledged to aid victims of the disaster, by deducting costs related to the oil spill.

A portion of that could be refunded from taxes BP paid in earlier years.

The company disclosed its intentions as part of its second-quarter earnings report, in which it said it would record a $32.2 billion charge to reflect the costs of the spill.

Under U.S. corporate tax law, companies can take credits on up to 35 percent of their losses.

The credit for BP could mean, however, that taxpayers will indirectly foot part of the bill for the $20 billion fund that BP established to compensate people and businesses harmed by the disaster.

On Tuesday, White House press secretary Robert Gibbs said U.S. taxpayers would not be responsible for the cost of the spill. When asked whether BP should be claiming a credit, Gibbs said, "I don't think anybody would prefer that they do that."

Gibbs would not say whether the president would press BP on the tax deduction. He said, though, that "there are tax laws in this country that have been written for quite some time."

Lawmakers called for BP to renounce any claim for a refund. "I call on BP to show, for once, a glimmer of humanity in this situation and halt its claim for this tax break immediately," said Rep. Eliot L. Engel (D-N.Y.).

Policymakers crafted the tax code this way so that companies can spread their profits and losses over more than just one calendar year. Let's say a company makes $100 billion one year and pays the U.S. corporate tax rate of 35 percent, or $35 billion. The next year, the economy goes south, and the company loses $100 billion. Over those two years, the company made nothing but still paid $35 billion in taxes.

From the tax code's perspective, the company overpaid in previous years. To rectify this, companies can claim a credit, also at the 35 percent rate. Companies can seek a refund for taxes paid from the previous two years or, if there's money leftover, carry the credit forward up to 20 years.

"What they're trying to do is take the arbitrariness of what you did this particular year over the life of the company, or over a long period of the life of the company," said Douglas Shackelford, a tax professor at the University of North Carolina.

It's how a company such as General Electric, which reported $408 million in losses at its U.S. operations last year, not only paid nothing in U.S. corporate income taxes last year but also received a refund.

Robert Willens, a corporate tax expert, said it's unlikely that BP will give up its tax credit, even if faced with public opposition. The company voluntarily established the $20 billion escrow account for victims of the spill and never promised the government that it would not seek any deductions associated with the spill, he said.

This month, Goldman Sachs promised not to ask for tax credits associated with the $535 million it paid in penalties to the Securities and Exchange Commission to settle a fraud charge. But as Willens says, that was specifically negotiated in Goldman's agreement with the SEC.

"The cost associated with the cleanup and the damage and all that -- that's just another cost of doing business from the tax perspective," Shackelford said. "It's viewed no different from paying salaries or other costs they might incur."

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