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	2014			2013			2012
Current
Federal	$	181		$	(260	)	$	(71	)
Foreign	3,281			3,788			3,869
State	388			(41		)	300
Total current income taxes	$	3,850		$	3,487		$	4,098
Deferred
Federal	$	2,510		$	2,867		$	(4,558	)
Foreign	361			(716		)	900
State	476			548			(43		)
Total deferred income taxes	$	3,347		$	2,699		$	(3,701	)
Provision (benefit) for income tax on continuing operations before non-controlling interests ⁽¹⁾	$	7,197		$	6,186		$	397
Provision (benefit) for income taxes on discontinued operations	12			(244		)	(52		)
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	65			(48		)	(709		)
Investment securities	1,007			(1,300		)	369
Employee stock plans	(87		)	28			265
Cash flow hedges	207			625			311
Benefit plans	(660		)	698			(390		)
Retained earnings⁽²⁾	(353		)	—			—
Income taxes before non-controlling interests	$	7,388		$	5,945		$	133


(1)	Includes the effect of securities transactions and other-than-temporary-impairment losses resulting in a provision (benefit) of $200 million and $(148) million in 2014, $262 million and $(187) million in 2013 and $1,138 million and $(1,740) million in 2012, respectively.


(2)	See “Consolidated Statement of Changes in Stockholders’ Equity” above.

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 non-controlling interests and the cumulative effect of accounting changes) for the years ended December 31 was as follows:



	2014		2013		2012
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	3.4		1.7		2.9
Foreign income tax rate differential	(0.8	)	(2.2	)	(4.4	)
Audit settlements ⁽¹⁾	(2.4	)	(0.6	)	(11.3	)
Effect of tax law changes⁽²⁾	1.2		(0.3	)	(0.1	)
Nondeductible legal and related expenses	18.3		0.8		0.2
Basis difference in affiliates	(2.5	)	—		(8.8	)
Tax advantaged investments	(3.6	)	(3.0	)	(8.6	)
Other, net	0.4		(0.2	)	—
Effective income tax rate	49.0	%	31.2	%	4.9	%

(1)

For 2014, relates to the conclusion of the audit of various issues in the Company’s 2009-2011 U.S. federal tax audit and the conclusion of a New York State tax audit for 2006-2008. 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 2014, includes the results of corporate tax reforms enacted in New York and South Dakota which resulted in a DTA charge of approximately $210 million.

As set forth in the table above, Citi’s effective tax rate for 2014 was 49.0%, which included a tax benefit of $347 million for the resolution of certain tax items during the year. This was higher than the effective tax rate for 2013 of 31.2% due primarily to the effect of the level of non-deductible legal and related expenses on the comparably lower level of pretax income in 2014. Also included in 2013 is a $127 million tax benefit related to the resolution of certain tax audit items during that year.

In addition, 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 2014 and 2013 tax provisions on these foreign subsidiary earnings to the higher U.S. tax rate and thus increased Citi’s effective tax rate for 2014 and 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	2014			2013
Deferred tax assets
Credit loss deduction	$	7,010		$	8,356
Deferred compensation and employee benefits	4,676			4,067
Restructuring and settlement reserves	1,599			1,806
Unremitted foreign earnings	6,368			6,910
Investment and loan basis differences	4,808			4,274
Cash flow hedges	529			736
Tax credit and net operating loss carry-forwards	23,395			26,097
Fixed assets and leases	2,093			666
Other deferred tax assets	2,334			2,734
Gross deferred tax assets	$	52,812		$	55,646
Valuation allowance	—			—
Deferred tax assets after valuation allowance	$	52,812		$	55,646
Deferred tax liabilities
Deferred policy acquisition costs and value of insurance in force	$	(415	)	$	(455	)
Intangibles	(1,636		)	(1,076		)
Debt issuances	(866		)	(811		)
Other deferred tax liabilities	(559		)	(640		)
Gross deferred tax liabilities	$	(3,476	)	$	(2,982	)
Net deferred tax assets	$	49,336		$	52,664

Unrecognized Tax Benefits

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



In millions of dollars	2014			2013			2012
Total unrecognized tax benefits at January 1	$	1,574		$	3,109		$	3,923
Net amount of increases for current year’s tax positions	135			58			136
Gross amount of increases for prior years’ tax positions	175			251			345
Gross amount of decreases for prior years’ tax positions	(772		)	(716		)	(1,246		)
Amounts of decreases relating to settlements	(28		)	(1,115		)	(44		)
Reductions due to lapse of statutes of limitation	(30		)	(15		)	(3		)
Foreign exchange, acquisitions and dispositions	6			2			(2		)
Total unrecognized tax benefits at December 31	$	1,060		$	1,574		$	3,109

The total amounts of unrecognized tax benefits at December 31, 2014, 2013 and 2012 that, if recognized, would affect Citi’s effective tax rate, are $0.8 billion, $0.8 billion and $1.3 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 was recognized in Retained earnings in 2014.

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



	2014						2013						2012
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	$	277		$	173		$	492		$	315		$	404	$	261
Total interest and penalties in the Consolidated Statement of Income	(1		)	(1		)	(108		)	(72		)	114		71
Total interest and penalties in the Consolidated Balance Sheet at December 31 ⁽¹⁾	269			169			277			173			492		315


(1)	Includes $2 million, $2 million, and $10 million for foreign penalties in 2014, 2013 and 2012, respectively. Also includes $3 million for state penalties in 2014, and $4 million for 2013 and 2012.

As of December 31, 2014, Citi 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 2012-2013 cycle within the next 12 months. The gross uncertain tax positions at December 31, 2014 for the items that may be resolved are as much as $120 million. Because of the number and nature of the issues remaining to be resolved, the potential tax benefit to continuing operations could be anywhere in a range between $0 to $120 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, 2014 are as much as $214 million. In addition, there is gross interest of as much as $146 million. The potential tax benefit to continuing operations could be anywhere between $0 and $230 million, including 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	2012
Mexico	2009
New York State and City	2006
United Kingdom	2013
India	2010
Brazil	2010
Singapore	2007
Hong Kong	2008
Ireland	2010

Foreign Earnings

Foreign pretax earnings approximated $10.1 billion in 2014, $13.1 billion in 2013 (of which $0.1 billion was in Discontinued operations) and $14.7 billion in 2012. 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, 2014, $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 $11.6 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, 2014, the amount of the base year reserves totaled approximately $358 million (subject to a tax of $125 million).

Deferred Tax Assets

As of December 31, 2014 and 2013, Citi had no valuation allowance on its DTAs.



In billions of dollars
Jurisdiction/component	DTAs balance December 31, 2014		DTAs balance December 31, 2013
U.S. federal ⁽¹⁾
Net operating losses (NOLs)⁽²⁾	$	2.3	$	1.4
Foreign tax credits (FTCs)⁽³⁾	17.6		19.6
General business credits (GBCs)	1.6		2.5
Future tax deductions and credits	21.1		21.4
Total U.S. federal	$	42.6	$	44.9
State and local
New York NOLs	$	1.5	$	1.4
Other state NOLs	0.4		0.5
Future tax deductions	2.0		2.4
Total state and local	$	3.9	$	4.3
Foreign
APB 23 subsidiary NOLs	$	0.2	$	0.2
Non-APB 23 subsidiary NOLs	0.5		1.2
Future tax deductions	2.1		2.1
Total foreign	$	2.8	$	3.5
Total	$	49.3	$	52.7


(1)	Included in the net U.S. federal DTAs of $42.6 billion as of December 31, 2014 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 in both 2014 and 2013 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 $1.7 billion and $0.8 billion of non-consolidated tax return NOL carry-forwards for 2014 and 2013, respectively, that are eventually expected to be utilized in Citigroup’s consolidated tax return.


(3)	Includes $1.0 billion and $0.7 billion for 2014 and 2013, respectively, 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, 2014 and 2013:



In billions of dollars
Year of expiration	December 31, 2014		December 31, 2013
U.S. tax return foreign tax credit carry-forwards
2017	$	1.9	$	4.7
2018	5.2		5.2
2019	1.2		1.2
2020	3.1		3.1
2021	1.8		1.4
2022	3.4		3.3
2023⁽¹⁾	1.0		0.7
Total U.S. tax return foreign tax credit carry-forwards	$	17.6	$	19.6
U.S. tax return general business credit carry-forwards
2028	$	—	$	0.4
2029	—		0.4
2030	0.4		0.4
2031	0.3		0.4
2032	0.4		0.5
2033	0.3		0.4
2034	0.2		—
Total U.S. tax return general business credit carry-forwards	$	1.6	$	2.5
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		1.7
2033	1.9		1.7
2034	2.3		—
Total U.S. subsidiary separate federal NOL carry-forwards ⁽²⁾	$	6.5	$	4.0
New York State NOL carry-forwards
2027	$	—	$	0.1
2028	—		6.5
2030	—		2.0
2031	—		0.1
2032	—		0.9
2033	—		—
2034	12.3		—
Total New York State NOL carry-forwards ⁽²⁾	$	12.3	$	9.6
New York City NOL carry-forwards
2027	$	—	$	0.1
2028	3.8		3.9
2029	—		1.5
2031	0.1		—
2032	0.5		0.6
Total New York City NOL carry-forwards⁽²⁾	$	4.4	$	6.1
APB 23 subsidiary NOL carry-forwards
Various	$	0.2	$	0.2
Total APB 23 subsidiary NOL carry-forwards	$	0.2	$	0.2


(1)	The $1.0 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 $49.3 billion at December 31, 2014 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 $81 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 realizability 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, 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 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 $59 billion as of December 31, 2014 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 $17.6 billion as of December 31, 2014, compared to $19.6 billion as of December 31, 2013. This decrease represented $2.0 billion of the $3.4 billion decrease in Citi’s overall DTAs during 2014. 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.