Citibank 2012 Annual Report Download - page 208

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While Citi’s net total DTAs increased year-over-year, the time remaining
for utilization has shortened, given the passage of time, particularly with
respect to the foreign tax credit (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 $55.3 billion at December 31, 2012 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 $112 billion of U.S. taxable income during
the respective carry-forward periods, substantially all of which must be
generated during the FTC carry-forward periods, to fully realize its U.S.
federal, state and local DTAs. Citi’s net DTAs will decline primarily as
additional domestic GAAP taxable income is generated.
Citi has concluded that there are two components of positive evidence
that 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, although Citi’s estimated future taxable income has
decreased due to the ongoing challenging economic environment, which will
continue to be subject to overall market and global economic conditions.
Citi’s forecasted taxable income 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), as well as 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, if necessary, 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 $63 billion as
of December 31, 2012 are allowed to be reclassified as foreign source income
to the extent of 50% of domestic source income produced in subsequent
years. Resulting foreign source income would cover the FTCs being carried
forward. 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.
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.