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A report released today spotlights a common practice where corporations that commit wrongdoing and agree to financial settlements with the federal government can claim such settlement payments as tax-deductible business expenses. The new study, “Subsidizing Bad Behavior: How Corporate Settlements for Harming the Public Become Lucrative Tax Write Offs, with Recommendations for Reform,” released by the Arizona PIRG Education Fund, follows a record year of corporate settlements.
“When corporations treat the financial settlements from wrongdoing as ordinary costs of doing business, they force taxpayers to pick up the tab,” said Serena Unrein, Public Interest Advocate for the Arizona PIRG Education Fund. “While debate rages over how to address our country’s deficit, we can ill-afford to subsidize the misdeeds of corporations like BP.”
The study shows that federal law is supposed to forbid corporations from deducting the cost of fines and penalties, including when corporations agree to pay these punitive measures as part of a negotiated settlement. However, unless explicitly told otherwise, corporate wrongdoers utilize ambiguities in the tax law to avoid paying a significant portion of such payments. For instance, the $1.5 billion settlement that UBS agreed to last month could burden taxpayers with up to $245 million in tax subsidies.
The report offers several recommendations for the federal government in order to better protect taxpayers from having to pay for portions of corporate settlements. The Arizona PIRG Education Fund suggests that:
- As a matter of truth in advertising, agencies should be instructed to publicize the expected after-tax amounts of settlements, which would more accurately report the net penalty that will be paid by the corporation.
- The President should instruct federal regulatory bodies to assume full responsibility for determining the extent to which settlement payments are punitive and therefore nondeductible.
- When companies treat public harm as an acceptable business risk, agencies should forbid tax deductibility of settlement payments.
- Following the recommendations of the past three administrations, Congress should prohibit the tax deduction of punitive settlement payments to private parties.
“The tax treatment of settlements has a real impact on our country’s finances. Every dollar that doesn’t get paid to the Treasury means another dollar in debt, government service cuts, or higher taxes that the rest of us must bear,” said Unrein.
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