INCOME TAXES |
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Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
INCOME TAXES | INCOME TAXES Income Tax Provision Details of the Company’s income tax provision are presented below:
(1)Includes the tax on realized investment gains and impairment losses resulting in a provision (benefit) of $454 million and $(14) million in 2020, $373 million and $(9) million in 2019 and $104 million and $(32) million in 2018, respectively. (2)2020 reflects the tax effect of ASU 2016-13 for current expected credit losses (CECL). 2019 reflects the tax effect of the accounting change for ASU 2016-02 for lease transactions. 2018 reflects the tax effect of the accounting change for ASU 2016-16 for intra-entity transfers of assets and the tax effect of the accounting change for ASU 2018-03, to report the net unrealized gains on former AFS equity securities. See Note 1 to the Consolidated Financial Statements. Tax Rate The reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate applicable to income from continuing operations (before noncontrolling interests and the cumulative effect of accounting changes) for each of the periods indicated is as follows:
(1)2018 includes one-time Tax Reform benefits of $94 million for amounts that were considered provisional pursuant to SAB 118. (2)See “Deferred Tax Assets” below for a description of the components. As set forth in the table above, Citi’s effective tax rate for 2020 was 18.5%, the same as 2019. Deferred Income Taxes Deferred income taxes at December 31 related to the following:
Unrecognized Tax Benefits The following is a rollforward of the Company’s unrecognized tax benefits:
The total amounts of unrecognized tax benefits at December 31, 2020, 2019 and 2018 that, if recognized, would affect Citi’s tax expense are $0.7 billion, $0.6 billion and $0.4 billion, respectively. The remaining uncertain tax positions have offsetting amounts in other jurisdictions or are temporary differences. Interest and penalties (not included in unrecognized tax benefits above) are a component of Provision for income taxes.
(1)Includes $4 million, $3 million and $2 million for non-U.S. penalties in 2020, 2019 and 2018. Also includes $1 million, $1 million and $1 million for state penalties in 2020, 2019 and 2018. As of December 31, 2020, Citi was under audit by the Internal Revenue Service and other major taxing jurisdictions around the world. It is thus reasonably possible that significant changes in the gross balance of unrecognized tax benefits may occur within the next 12 months.The potential range of amounts that could affect Citi’s effective tax rate is between $0 and $150 million. The following are the major tax jurisdictions in which the Company and its affiliates operate and the earliest tax year subject to examination:
Non-U.S. Earnings Non-U.S. pretax earnings approximated $13.8 billion in 2020, $16.7 billion in 2019 and $16.1 billion in 2018. As a U.S. corporation, Citigroup and its U.S. subsidiaries are currently subject to U.S. taxation on all non-U.S. pretax earnings of non-U.S. branches. Beginning in 2018, there is a separate foreign tax credit (FTC) basket for branches. Also, dividends from a non-U.S. subsidiary or affiliate are effectively exempt from U.S. taxation. The Company provides income taxes on the book over tax basis differences of non-U.S. subsidiaries except to the extent that such differences are indefinitely reinvested outside the U.S. At December 31, 2020, $11.0 billion of basis differences of non-U.S. entities was indefinitely invested. At the existing tax rates, additional taxes (net of U.S. FTCs) of $4.3 billion would have to be provided if such assertions were reversed. Income taxes are not provided for the Company’s “savings bank base year bad debt reserves” that arose before 1988, because under current U.S. tax rules, such taxes will become payable only to the extent that such amounts are distributed in excess of limits prescribed by federal law. At December 31, 2020, the amount of the base year reserves totaled approximately $358 million (subject to a tax of $75 million). Deferred Tax Assets As of December 31, 2020, Citi had a valuation allowance of $5.2 billion, composed of valuation allowances of $1.0 billion on its general basket FTC carry-forwards, $2.4 billion on its branch basket FTC carry-forwards, $1.0 billion on its U.S. residual DTA related to its non-U.S. branches, $0.6 billion on local non-U.S. DTAs and $0.2 billion on state net operating loss carry-forwards. The amount of Citi’s valuation allowances (VA) may change in future years. In 2020, Citi’s VA for carry-forward FTCs in its branch basket decreased by $1.0 billion and the related VA for the U.S. tax effect on non-U.S. branch temporary differences increased by $0.2 billion. Of this total branch-related change of $0.8 billion, $0.6 billion impacted the tax provision as discussed below. The remainder of the branch basket-related VA decrease of $0.2 billion was primarily due to carry-forward expirations and changes in foreign exchange rates. The level of branch pretax income, the local branch tax rate and the allocations of Overall Domestic Loss (ODL) and expenses for U.S. tax purposes to the branch basket are the main factors in determining the branch VA. Citi computed these factors for 2020. While the COVID-19 pandemic reduced branch earnings, the allocated ODL was not diminished since a large portion of the pandemic losses will not be recognizable for U.S. taxable income until a future period. In addition, lower than forecasted U.S. interest rates resulted in a lower allocation of interest expense to non-U.S. branches. The combination of the factors enumerated are reflected in the VA release of $0.5 billion in Citi’s full-year effective tax rate. Citi also released branch basket VA of $0.1 billion in the fourth quarter, with respect to future years, based upon Citi’s Operating Plan and estimates of future branch basket factors, as outlined above. In Citi’s general basket for FTCs, changes in the forecasted amount of income in U.S. locations derived from sources outside the U.S., in addition to tax examination changes from prior years, could alter the amount of valuation allowance that is needed against such FTCs. The valuation allowance for the general basket decreased by $0.1 billion to $1.0 billion, primarily due to the expiration of carry-forwards in 2020. In the general FTC basket, foreign source income, an important driver in the utilization of FTC carry-forwards for the current year and future years, has been reduced due to the compression in interest rate spreads. The pandemic has otherwise reduced U.S. income, which impacts ODL usage and, correspondingly, the utilization of FTC carry-forwards. Accordingly, management identified actions, which became prudent due to the effects of the pandemic, to increase future foreign source income and U.S. taxable income. These planning actions include geographic asset movements, deferral of future FTC recognition and capitalization of expenses for tax purposes, resulting in no tax provision change to Citi’s general basket VA in 2020. In light of the pandemic, Citi will continue to monitor its forecasts and mix of earnings, which could affect Citi’s valuation allowance against FTC carry-forwards. Citi continues to look for additional actions that are prudent and feasible, taking into account client, regulatory and operational considerations. The valuation allowance for U.S. residual DTA related to its non-U.S. branches increased from $0.8 billion to $1.0 billion, primarily due to higher capitalized expenses. In addition, the non-U.S. local valuation allowance was reduced from $1.0 billion to $0.6 billion, primarily due to an expiration of NOL carry-forwards in a non-U.S. jurisdiction. The following table summarizes Citi’s DTAs:
(1)All amounts are net of valuation allowances. (2)Included in the net U.S. federal DTAs of $18.9 billion as of December 31, 2020 were deferred tax liabilities of $3.7 billion that will reverse in the relevant carry-forward period and may be used to support the DTAs. (3)Consists of non-consolidated tax return NOL carry-forwards that are eventually expected to be utilized in Citigroup’s consolidated tax return. The following table summarizes the amounts of tax carry-forwards and their expiration dates:
(1)Before valuation allowance. (2)Pretax. The time remaining for utilization of the FTC component has shortened, given the passage of time. Although realization is not assured, Citi believes that the realization of the recognized net DTAs of $24.8 billion at December 31, 2020 is more-likely-than-not, based upon expectations as to future taxable income in the jurisdictions in which the DTAs arise and consideration of available tax planning strategies (as defined in ASC 740, Income Taxes). The majority of Citi’s U.S. federal net operating loss carry-forward and all of its New York State and City net operating loss carry-forwards, are subject to a carry-forward period of 20 years. This provides enough time to fully utilize the DTAs pertaining to these existing NOL carry-forwards. This is due to Citi’s forecast of sufficient U.S. taxable income and the fact that New York State and City continue to tax Citi’s non-U.S. income. With respect to the FTCs component of the DTAs, the carry-forward period is 10 years. Utilization of FTCs in any year is generally limited to 21% of foreign source taxable income in that year. However, overall domestic losses that Citi has incurred of approximately $26 billion as of December 31, 2020 are allowed to be reclassified as foreign source income to the extent of 50%–100% (at taxpayer’s election) of domestic source income produced in subsequent years. Such resulting foreign source income would substantially cover the FTC carry-forwards after valuation allowance. As noted in the tables above, Citi’s FTC carry-forwards were $4.4 billion ($7.8 billion before valuation allowance) as of December 31, 2020, compared to $6.3 billion as of December 31, 2019. Citi believes that it will generate sufficient U.S. taxable income within the 10-year carry-forward period to be able to utilize the net FTCs after the valuation allowance, after considering any FTCs produced in the tax return for such period, which must be used prior to any carry-forward utilization.
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