Citibank 2008 Annual Report Download - page 159

The Company is currently 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, but the Company does not
expect such audits to result in amounts that would cause a significant
change to its effective tax rate, other than the following items. The Company
is currently at IRS Appeals for the years 1999–2002. One of the issues relates
to the timing of the inclusion of interchange fees received by the Company
relating to credit card purchases by its cardholders. It is reasonably possible
that within the next 12 months the Company can either reach agreement on
this issue at Appeals or decide to litigate the issue. This issue is presently
being litigated by another company in a United States Tax Court case. The
gross uncertain tax position for this item at December 31, 2008 is $542
million. Since this is a temporary difference, the only effect to the Company’s
effective tax rate would be due to net interest and state tax rate differentials.
If the reserve were to be released, the tax benefit could be as much as $168
million. In addition, the Company expects to conclude the IRS audit of its
U.S. federal consolidated income tax returns for the years 2003–2005 within
the next 12 months. The gross uncertain tax position at December 31, 2008
for the items expected to be resolved is approximately $350 million plus gross
interest of $70 million. The potential net tax benefit to continuing operations
could be approximately $325 million.
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 2003
Mexico 2006
New York State and City 2005
United Kingdom 2007
Germany 2000
Korea 2005
Japan 2006
Brazil 2004
Foreign pretax earnings approximated $10.3 billion in 2008, $9.1 billion in
2007, and $13.6 billion in 2006 ($5.1 billion, $0.7 billion and $0.9 billion of
which, respectively, are in discontinued operations). As a U.S. corporation,
Citigroup and its U.S. subsidiaries are subject to U.S. taxation currently 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
invested outside the United States. At December 31, 2008, $22.8 billion of
accumulated undistributed earnings of non-U.S. subsidiaries were indefinitely
invested. At the existing U.S. federal income tax rate, additional taxes (net of
U.S. foreign tax credits) of $6.1 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 on the previous page.
Income taxes are not provided for on 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, 2008, the amount of the base
year reserves totaled approximately $358 million (subject to a tax of $125 million).
The Company has no valuation allowance on deferred tax assets at
December 31, 2008 and December 31, 2007.
At December 31, 2008, the Company had a U.S. foreign tax-credit
carryforward of $10.5 billion, $0.4 billion whose expiry date is 2016, $5.3
billion whose expiry date is 2017 and $4.8 billion whose expiry date is 2018.
The Company has a U.S federal consolidated net operating loss (NOL)
carryforward of approximately $13 billion whose expiration date is 2028. The
Company also has a general business credit carryforward of $0.6 billion
whose expiration dates are 2027-2028. The Company has state and local net
operating loss carryforwards of $16.2 billion and $4.9 billion in New York
State and New York City, respectively. This consists of $2.4 billion and $1.2
billion, whose expiration date is 2027 and $13.8 billion and $3.7 billion
whose expiration date is 2028 and for which the Company has recorded a
deferred-tax asset of $1.2 billion, along with less significant net operating
losses in various other states for which the Company has recorded a
deferred-tax asset of $399 million and which expire between 2012 and 2028.
In addition, the Company has recorded deferred-tax assets in APB 23
subsidiaries for foreign net operating loss carryforwards of $130 million
(which expires in 2018) and $101 million (with no expiration).
Although realization is not assured, the Company believes that the
realization of the recognized net deferred tax asset of $44.5 billion is more
likely than not based on expectations as to future taxable income in the
jurisdictions in which it operates and available tax planning strategies, as
defined in SFAS 109, that could be implemented if necessary to prevent a
carryforward from expiring. The Company’s net deferred tax asset (DTA) of
$44.5 billion consists of approximately $36.5 billion of net U.S. federal DTAs,
$4 billion of net state DTAs and $4 billion of net foreign DTAs. Included in
the net federal DTA of $36.5 billion are deferred tax liabilities of $4 billion
that will reverse in the relevant carryforward period and may be used to
support the DTA. The major components of the U.S. federal DTA are
$10.5 billion in foreign tax-credit carryforwards, $4.6 billion in a
net-operating-loss carryforward, $0.6 billion in a general-business-credit
carryforward, $19.9 billion in net deductions that have not yet been taken on
a tax return, and $0.9 billion in compensation deductions, which reduced
Additional paid-in capital in January 2009 and for which SFAS 123(R) did
not permit any adjustment to such DTA at December 31, 2008 because the
related stock compensation was not yet deductible to the Company. In
general, Citigroup would need to generate approximately $85 billion of
taxable income during the respective carryforward periods to fully realize its
federal, state and local DTAs.
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