Friday, September 24, 2010

Did BP See Them Coming?

An interesting story was related to me the other day that may explain why BP came up with its $20 billion escrow fund for Gulf oil spill reparations so quickly and pleasantly.  It has always seemed strange to me that the company acceded to the U.S. government's demands as fast as it did, although I have never doubted the company's sincerity in its efforts to plug the leak, clean up the spill, and help those who've been adversely affected.  However, if the figures I heard are correct, then BP itself did pretty well by the deal.  BP will only actually pay $7 billion into the fund in 2010.  However, because the $20 billion fund was established in 2010, it can therefore can be expensed in the year accrued - thus reducing their 2010 U.S. tax bill by a similar amount, ie. roughly $7 billion. BP was also convinced by the U.S. government to withhold dividends to their shareholders for the last 3 quarters of 2010, a savings of roughly $7.5 billion - about 40% of which would have been paid to U.S. citizens.  If the Bush tax cuts survive through the end of 2010, the US Treasury will thus lose $450 million in taxes on those missed dividends, plus any stimulus to the US economy that 40% of that $7.5 billion (ie. $3 billion in cash) might have provided.  I know it's a drop in the bucket but, hey, a billion here, a billion there ... it can add up!  To summarize, in 2010:
BP: Pays Escrow funding (-$7 billion)
      Gets Dividend savings of $7.5 billion
      Gets Tax savings of $7 billion
      NET: $7.5 billion
U.S. Treasury:  Loses BP Corporate Income Tax (-$7 billion)
                         Loses Dividend Taxes of (-$0.45 billion)
                         NET: (-$7.45 billion)
U.S. Public:  Loses Dividends of (-$3 billion)
                    less tax payable of $0.45 billion
                    NET: (-$2.55 billion)
So, apparently BP gets to save $7.5 billion, while the U.S. is potentially out $10 billion overall.  I think BP will be okay.  I'm not sure about the U.S. Treasury and economy though.
Read more: http://technorati.com/business/gurus/article/did-bp-see-them-coming/#ixzz10RBWI9cf
Article first published as Did 
BP See Them Coming? on Technorati.