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INCOME TAXES
12 Months Ended
Dec. 31, 2013
INCOME TAXES  
INCOME TAXES

9. INCOME TAXES

 

Details of the Company’s income tax provision for the years ended December 31 are presented in the table below:

 

Income Taxes

 

In millions of dollars

 

2013

 

2012

 

2011

 

Current

 

 

 

 

 

 

 

Federal

 

$

(260

)

$

(71

)

$

(144

)

Foreign

 

3,788

 

3,869

 

3,552

 

State

 

(41

)

300

 

241

 

Total current income taxes

 

$

3,487

 

$

4,098

 

$

3,649

 

Deferred

 

 

 

 

 

 

 

Federal

 

$

2,550

 

$

(4,943

)

$

(793

)

Foreign

 

(716

)

900

 

628

 

State

 

546

 

(48

)

91

 

Total deferred income taxes

 

$

2,380

 

$

(4,091

)

$

(74

)

Provision (benefit) for income tax on continuing operations before noncontrolling interests (1)

 

$

5,867

 

$

7

 

$

3,575

 

Provision (benefit) for income taxes on discontinued operations

 

(244

)

(52

)

12

 

Provision (benefit) for income taxes on cumulative effect of accounting changes

 

 

(58

)

 

Income tax expense (benefit) reported in stockholders’ equity related to:

 

 

 

 

 

 

 

Foreign currency translation

 

5

 

(709

)

(609

)

Investment securities

 

(1,353

)

369

 

1,495

 

Employee stock plans

 

28

 

265

 

297

 

Cash flow hedges

 

625

 

311

 

(92

)

Benefit Plans

 

698

 

(390

)

(235

)

Income taxes before noncontrolling interests

 

$

5,626

 

$

(257

)

$

4,443

 

 


(1)         Includes the effect of securities transactions and other-than-temporary-impairment losses resulting in a provision (benefit) of $262 million and $(187) million in 2013, $1,138 million and $(1,740) million in 2012 and $699 million and $(789) million in 2011, respectively.

 

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 the years ended December 31 was as follows:

 

 

 

2013

 

2012

 

2011

 

Federal statutory rate

 

35.0

%

35.0

%

35.0

%

State income taxes, net of federal benefit

 

1.7

 

3.0

 

1.5

 

Foreign income tax rate differential

 

(2.2

)

(4.6

)

(8.4

)

Audit settlements (1)

 

(0.6

)

(11.8

)

 

Effect of tax law changes (2)

 

(0.3

)

(0.1

)

2.0

 

Basis difference in affiliates

 

 

(9.2

)

 

Tax advantaged investments

 

(4.2

)

(12.4

)

(6.0

)

Other, net

 

0.7

 

0.2

 

0.2

 

Effective income tax rate

 

30.1

%

0.1

%

24.3

%

 


(1)         For 2013, relates to the settlement of U.S. federal issues for 2003-2005 at IRS appeals.  For 2012, relates to the conclusion of the audit of various issues in the Company’s 2006-2008 U.S. federal tax audits and the conclusion of a New York City tax audit for 2006-2008.

(2)         For 2011, includes the results of the Japan tax rate change which resulted in a $300 million DTA charge.

 

As set forth in the table above, Citi’s effective tax rate for 2013 was 30.1%, which included a tax benefit of $127 million for the resolution of certain tax items during the year.  This compared to an effective tax rate for 2012 of 0.1% due to the effect of permanent differences on the comparably lower level of pretax income.  2012 included a $925 million tax benefit, also related to the resolution of certain tax audit items during the year.

 

As previously disclosed, during 2013, Citi decided that earnings in certain foreign subsidiaries would no longer be indefinitely reinvested outside the U.S. (as asserted under ASC 740, Income Taxes). This decision increased Citi’s 2013 tax provision on these foreign subsidiary earnings to the higher U.S. tax rate and thus increased Citi’s effective tax rate for 2013 and reduced its after-tax earnings. For additional information on Citi’s foreign earnings, see “Foreign Earnings” below.

 

Deferred Income Taxes

 

Deferred income taxes at December 31 related to the following:

 

In millions of dollars

 

2013

 

2012

 

Deferred tax assets

 

 

 

 

 

Credit loss deduction

 

$

8,356

 

$

10,947

 

Deferred compensation and employee benefits

 

4,067

 

4,890

 

Restructuring and settlement reserves

 

1,806

 

1,645

 

Unremitted foreign earnings

 

6,910

 

5,114

 

Investment and loan basis differences

 

4,409

 

3,878

 

Cash flow hedges

 

736

 

1,361

 

Tax credit and net operating loss carry-forwards

 

26,097

 

28,087

 

Fixed assets and leases

 

666

 

 

Debt Issuances

 

 

614

 

Other deferred tax assets

 

2,734

 

1,964

 

Gross deferred tax assets

 

$

55,781

 

$

58,500

 

Valuation allowance

 

 

 

Deferred tax assets after valuation allowance

 

$

55,781

 

$

58,500

 

Deferred tax liabilities

 

 

 

 

 

Deferred policy acquisition costs and value of insurance in force

 

$

(455

)

$

(495

)

Fixed assets and leases

 

 

(623

)

Intangibles

 

(1,076

)

(1,517

)

Debt issuances

 

(811

)

 

Other deferred tax liabilities

 

(640

)

(543

)

Gross deferred tax liabilities

 

$

(2,982

)

$

(3,178

)

Net deferred tax assets

 

$

52,799

 

$

55,322

 

 

Unrecognized Tax Benefits

 

The following is a roll-forward of the Company’s unrecognized tax benefits.

 

In millions of dollars

 

2013

 

2012

 

2011

 

Total unrecognized tax benefits at January 1

 

$

3,109

 

$

3,923

 

$

4,035

 

Net amount of increases for current year’s tax positions

 

58

 

136

 

193

 

Gross amount of increases for prior years’ tax positions

 

251

 

345

 

251

 

Gross amount of decreases for prior years’ tax positions

 

(716

)

(1,246

)

(507

)

Amounts of decreases relating to settlements

 

(1,115

)

(44

)

(11

)

Reductions due to lapse of statutes of limitation

 

(15

)

(3

)

(38

)

Foreign exchange, acquisitions and dispositions

 

2

 

(2

)

 

Total unrecognized tax benefits at December 31

 

$

1,574

 

$

3,109

 

$

3,923

 

 

The total amounts of unrecognized tax benefits at December 31, 2013, 2012 and 2011 that, if recognized, would affect Citi’s effective tax rate, are $0.8 billion, $1.3 billion and $2.2 billion, respectively. The remaining uncertain tax positions have offsetting amounts in other jurisdictions or are temporary differences, except for $0.4 billion at December 31, 2013, which would be booked directly to Retained earnings.

 

Interest and penalties (not included in “unrecognized tax benefits” above) are a component of the Provision for income taxes.

 

 

 

2013

 

2012

 

2011

 

In millions of dollars

 

Pretax

 

Net of tax

 

Pretax

 

Net of tax

 

Pretax

 

Net of tax

 

Total interest and penalties in the Consolidated Balance Sheet at January 1

 

$

492

 

$

315

 

$

404

 

$

261

 

$

348

 

$

223

 

Total interest and penalties in the Consolidated Statement of Income

 

(108

)

(72

)

114

 

71

 

61

 

41

 

Total interest and penalties in the Consolidated Balance Sheet at December 31 (1)

 

277

 

173

 

492

 

315

 

404

 

261

 

 


(1)         Includes $2 million, $10 million and $14 million for foreign penalties in 2013, 2012 and 2011, respectively.  Also includes $4 million for state penalties in 2013, 2012 and 2011.

 

Citi currently is 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, although Citi does not expect such audits to result in amounts that would cause a significant change to its effective tax rate, other than as discussed below.

 

Citi expects to conclude its IRS audit for the 2009-2011 cycle within the next 12 months. The gross uncertain tax positions at December 31, 2013 for the items that may be resolved are as much as $520 million. Because of the number and nature of the issues remaining to be resolved, the potential tax benefit to continuing operations could be anywhere from $0 to $150 million, while the potential tax benefit to retained earnings could be from $0 to $350 million. In addition, Citi may conclude certain state and local tax audits within the next 12 months. The gross uncertain tax positions at December 31, 2013 are as much as $170 million. The potential tax benefit to continuing operations could be anywhere between $0 and $110 million, excluding interest.

 

The following are the major tax jurisdictions in which the Company and its affiliates operate and the earliest tax year subject to examination:

 

Jurisdiction

 

Tax year

 

United States

 

2009

 

Mexico

 

2008

 

New York State and City

 

2005

 

United Kingdom

 

2012

 

India

 

2009

 

Brazil

 

2009

 

Singapore

 

2007

 

Hong Kong

 

2007

 

Ireland

 

2010

 

 

Foreign Earnings

 

Foreign pretax earnings approximated $13.1 billion in 2013, $14.7 billion in 2012 and $13.1 billion in 2011 (of which $0.1 billion, $0.0 billion and $0.1 billion, respectively, are in Discontinued operations).  As a U.S. corporation, Citigroup and its U.S. subsidiaries are subject to U.S. taxation on all foreign pretax earnings earned by a foreign branch. Pretax earnings of a foreign subsidiary or affiliate are subject to U.S. taxation when effectively repatriated.  The Company provides income taxes on the undistributed earnings of non-U.S. subsidiaries except to the extent that such earnings are indefinitely reinvested outside the United States.

 

At December 31, 2013, $43.8 billion of accumulated undistributed earnings of non-U.S. subsidiaries was indefinitely invested.  At the existing U.S. federal income tax rate, additional taxes (net of U.S. foreign tax credits) of $11.7 billion would have to be provided if such earnings were remitted currently.  The current year’s effect on the income tax expense from continuing operations is included in the “Foreign income tax rate differential” line in the reconciliation of the federal statutory rate to the Company’s effective income tax rate in the table above.

 

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 such amounts are distributed in excess of limits prescribed by federal law.  At December 31, 2013, the amount of the base year reserves totaled approximately $358 million (subject to a tax of $125 million).

 

DTAs

 

As of December 31, 2013 and 2012, Citi had no valuation allowance on its DTAs.

 

In billions of dollars

 

Jurisdiction/component

 

DTAs balance
December 31,
2013

 

DTAs balance
December 31,
2012

 

U.S. federal (1)

 

 

 

 

 

Net operating losses (NOLs)(2)

 

$

1.4

 

$

0.8

 

Foreign tax credits (FTCs)(3)

 

19.6

 

22.0

 

Consolidated tax return general business credits (GBCs)

 

2.5

 

2.6

 

Future tax deductions and credits

 

21.5

 

22.0

 

Other

 

 

0.1

 

Total U.S. federal

 

$

45.0

 

$

47.5

 

State and local

 

 

 

 

 

New York NOLs

 

$

1.4

 

$

1.3

 

Other state NOLs

 

0.5

 

0.6

 

Future tax deductions

 

2.4

 

2.6

 

Total state and local

 

$

4.3

 

$

4.5

 

Foreign

 

 

 

 

 

APB 23 subsidiary NOLs

 

$

0.2

 

$

0.2

 

Non-APB 23 subsidiary NOLs

 

1.2

 

1.2

 

Future tax deductions

 

2.1

 

1.9

 

Total foreign

 

$

3.5

 

$

3.3

 

Total

 

$

52.8

 

$

55.3

 

 


(1)         Included in the net U.S. federal DTAs of $45.0 billion as of December 31, 2013 were deferred tax liabilities of $2 billion that will reverse in the relevant carry-forward period and may be used to support the DTAs.

(2)         Includes $0.6 billion and $0.8 billion for 2013 and 2012, respectively, of        NOL carry-forwards related to non-consolidated tax return companies that are expected to be utilized separately from Citigroup’s consolidated tax return and $0.8 billion of non-consolidated tax return NOL carry-forwards for 2013 that are eventually expected to be utilized in Citigroup’s consolidated tax return.

(3)         Includes $0.7 billion of non-consolidated tax return FTC 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 as of December 31, 2013:

 

In billions of dollars

 

 

 

Amount

 

Year of expiration

 

December 
31, 2013

 

December 31,
2012

 

U.S. tax return foreign tax credit carry-forwards

 

 

 

 

 

2016

 

$

 

$

0.4

 

2017

 

4.7

 

6.6

 

2018

 

5.2

 

5.3

 

2019

 

1.2

 

1.3

 

2020

 

3.1

 

2.3

 

2021

 

1.4

 

1.9

 

2022

 

3.3

 

4.2

 

2023(1)

 

0.7

 

 

Total U.S. tax return foreign tax credit carry-forwards

 

$

19.6

 

$

22.0

 

U.S. tax return general business credit carry-forwards

 

 

 

 

 

2027

 

$

 

$

0.3

 

2028

 

0.4

 

0.4

 

2029

 

0.4

 

0.4

 

2030

 

0.4

 

0.5

 

2031

 

0.4

 

0.5

 

2032

 

0.5

 

0.5

 

2033

 

0.4

 

 

Total U.S. tax return general business credit carry-forwards

 

$

2.5

 

$

2.6

 

U.S. subsidiary separate federal NOL carry-forwards

 

 

 

 

 

2027

 

$

0.2

 

$

0.2

 

2028

 

0.1

 

0.1

 

2030

 

0.3

 

0.3

 

2031

 

1.7

 

1.8

 

2033

 

1.7

 

 

Total U.S. subsidiary separate federal NOL carry-forwards (2)

 

$

4.0

 

$

2.4

 

New York State NOL carry-forwards

 

 

 

 

 

2027

 

$

0.1

 

$

0.1

 

2028

 

6.5

 

7.2

 

2029

 

2.0

 

1.9

 

2030

 

0.1

 

0.4

 

2032

 

0.9

 

 

Total New York State NOL carry-forwards (2)

 

$

9.6

 

$

9.6

 

New York City NOL carry-forwards

 

 

 

 

 

2027

 

$

0.1

 

$

0.1

 

2028

 

3.9

 

3.7

 

2029

 

1.5

 

1.6

 

2032

 

0.6

 

0.2

 

Total New York City NOL carry-forwards (2)

 

$

6.1

 

$

5.6

 

APB 23 subsidiary NOL carry-forwards

 

 

 

 

 

Various

 

$

0.2

 

$

0.2

 

Total APB 23 subsidiary NOL carry-forwards

 

$

0.2

 

$

0.2

 

 


(1)         The $0.7 billion in FTC carry-forwards that expires in 2023 is in a non-consolidated tax return entity but is eventually expected to be utilized in Citigroup’s consolidated tax return.

(2)         Pretax.

 

While Citi’s net total DTAs decreased year-over-year, the time remaining for utilization has shortened, given the passage of time, particularly with respect to the FTC component of the DTAs. Realization of the DTAs will continue to be driven by Citi’s ability to generate U.S. taxable earnings in the carry-forward periods, including through actions that optimize Citi’s U.S. taxable earnings.

 

Although realization is not assured, Citi believes that the realization of the recognized net DTAs of $52.8 billion at December 31, 2013 is more likely than not based upon expectations as to future taxable income in the jurisdictions in which the DTAs arise and available tax planning strategies (as defined in ASC 740, Income Taxes) that would be implemented, if necessary, to prevent a carry-forward from expiring. In general, Citi would need to generate approximately $98 billion of U.S. taxable income during the FTC carry-forward periods to prevent this most time sensitive component of Citi’s DTAs from expiring. Citi’s net DTAs will decline primarily as additional domestic GAAP taxable income is generated.

 

Citi has concluded that two components of positive evidence support the full realization of its DTAs.  First, Citi forecasts sufficient U.S. taxable income in the carry-forward periods, exclusive of ASC 740 tax planning strategies. Citi’s forecasted taxable income, which will continue to be subject to overall market and global economic conditions, incorporates geographic business forecasts and taxable income adjustments to those forecasts (e.g., U.S. tax exempt income, loan loss reserves deductible for U.S. tax reporting in subsequent years), and actions intended to optimize its U.S. taxable earnings.

 

Second, Citi has sufficient tax planning strategies available to it under ASC 740 that would be implemented to prevent a carry-forward from expiring. These strategies include: repatriating low taxed foreign source earnings for which an assertion that the earnings have been indefinitely reinvested has not been made; accelerating U.S. taxable income into, or deferring U.S. tax deductions out of, the latter years of the carry-forward period (e.g., selling appreciated intangible assets, electing straight-line depreciation); accelerating deductible temporary differences outside the U.S.; and selling certain assets that produce tax-exempt income, while purchasing assets that produce fully taxable income. In addition, the sale or restructuring of certain businesses can produce significant U.S. taxable income within the relevant carry-forward periods.

 

Based upon the foregoing discussion, Citi believes the U.S. federal and New York state and city NOL carry-forward period of 20 years provides enough time to fully utilize the DTAs pertaining to the existing NOL carry-forwards and any NOL that would be created by the reversal of the future net deductions that have not yet been taken on a tax return.

 

The U.S. FTC carry-forward period is 10 years and represents the most time-sensitive component of Citi’s DTAs.  Utilization of FTCs in any year is restricted to 35% of foreign source taxable income in that year. However, overall domestic losses that Citi has incurred of approximately $64 billion as of December 31, 2013 are allowed to be reclassified as foreign source income to the extent of 50% of domestic source income produced in subsequent years. Such resulting foreign source income would cover the FTCs being carried forward. As such, Citi believes the foreign source taxable income limitation will not be an impediment to the FTC carry-forward usage, as long as Citi can generate sufficient domestic taxable income within the 10-year carry-forward period.

 

As noted in the tables above, Citi’s FTC carry-forwards were $19.6 billion as of December 31, 2013, compared to $22.0 billion as of December 31, 2012.  This decrease represented $2.4 billion of the $2.5 billion decrease in Citi’s overall DTAs during 2013. Citi believes that it will generate sufficient U.S. taxable income within the 10-year carry-forward period referenced above to be able to fully utilize the FTC carry-forward, in addition to any FTCs produced in such period, which must be used prior to any carry-forward utilization.