INCOME TAXES

Details of the Company’s income tax provision are presented below:

Income Tax Provision



In millions of dollars	2016			2015			2014
Current
Federal	$	1,016		$	861		$	181
Foreign	3,585			3,397			3,281
State	384			388			388
Total current income taxes	$	4,985		$	4,646		$	3,850
Deferred
Federal	$	1,280		$	3,019		$	2,510
Foreign	53			(4		)	361
State	126			(221		)	476
Total deferred income taxes	$	1,459		$	2,794		$	3,347
Provision for income tax on continuing operations before non-controlling interests⁽¹⁾	$	6,444		$	7,440		$	7,197
Provision (benefit) for income taxes on discontinued operations	(22		)	(29		)	12
Income tax expense (benefit) reported in stockholders’ equity related to:
FX translation	(402		)	(906		)	65
Investment securities	59			(498		)	1,007
Employee stock plans	13			(35		)	(87		)
Cash flow hedges	27			176			207
Benefit plans	(30		)	(24		)	(660		)
FVO DVA	(201		)	—			—
Retained earnings⁽²⁾	—			—			(353		)
Income taxes before non-controlling interests	$	5,888		$	6,124		$	7,388


(1)	Includes the effect of securities transactions and other-than-temporary-impairment losses resulting in a provision (benefit) of $332 million and $(217) million in 2016, $239 million and $(93) million in 2015 and $200 million and $(148) million in 2014, 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 each of the periods indicated is as follows:



	2016		2015		2014
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	1.8		1.7		3.4
Foreign income tax rate differential	(3.6	)	(4.6	)	(0.3	)
Audit settlements⁽¹⁾	(0.6	)	(1.7	)	(2.4	)
Effect of tax law changes⁽²⁾	—		0.4		1.2
Nondeductible legal and related expenses	—		0.3		18.3
Basis difference in affiliates	(0.1	)	—		(2.5	)
Tax advantaged investments	(2.4	)	(1.8	)	(3.6	)
Other, net	(0.1	)	0.7		(0.1	)
Effective income tax rate	30.0	%	30.0	%	49.0	%


(1)	For 2016, primarily relates to the conclusion of an IRS audit for 2012–2013. For 2015, primarily relates to the conclusion of a New York City tax audit for 2009–2011. 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.


(2)	For 2015, includes the results of tax reforms enacted in New York City and several states, which resulted in a DTA charge of approximately $101 million. For 2014, includes the results of tax reforms enacted in New York State 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 2016 was 30.0%, the same as the effective tax rate in 2015.

Deferred Income Taxes

Deferred income taxes at December 31 related to the following:



In millions of dollars	2016			2015
Deferred tax assets
Credit loss deduction	$	5,146		$	6,058
Deferred compensation and employee benefits	3,798			4,110
Repositioning and settlement reserves	1,033			1,429
Unremitted foreign earnings	9,311			8,403
Investment and loan basis differences	4,829			3,248
Cash flow hedges	327			359
Tax credit and net operating loss carry-forwards	20,793			23,053
Fixed assets and leases	1,739			1,356
Other deferred tax assets	2,714			3,176
Gross deferred tax assets	$	49,690		$	51,192
Valuation allowance	—			—
Deferred tax assets after valuation allowance	$	49,690		$	51,192
Deferred tax liabilities
Deferred policy acquisition costs and value of insurance in force	$	(5	)	$	(327	)
Intangibles	(1,711		)	(1,146		)
Debt issuances	(641		)	(850		)
Other deferred tax liabilities	(665		)	(1,020		)
Gross deferred tax liabilities	$	(3,022	)	$	(3,343	)
Net deferred tax assets	$	46,668		$	47,849

Unrecognized Tax Benefits

The following is a rollforward of the Company’s unrecognized tax benefits.



In millions of dollars	2016			2015			2014
Total unrecognized tax benefits at January 1	$	1,235		$	1,060		$	1,574
Net amount of increases for current year’s tax positions	34			32			135
Gross amount of increases for prior years’ tax positions	273			311			175
Gross amount of decreases for prior years’ tax positions	(225		)	(61		)	(772		)
Amounts of decreases relating to settlements	(174		)	(45		)	(28		)
Reductions due to lapse of statutes of limitation	(21		)	(22		)	(30		)
Foreign exchange, acquisitions and dispositions	(30		)	(40		)	6
Total unrecognized tax benefits at December 31	$	1,092		$	1,235		$	1,060

The total amounts of unrecognized tax benefits at December 31, 2016, 2015 and 2014 that, if recognized, would affect Citi’s tax expense, are $0.8 billion, $0.9 billion and $0.8 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 the Provision for income taxes.



	2016				2015						2014
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	$	233	$	146	$	269		$	169		$	277		$	173
Total interest and penalties in the Consolidated Statement of Income	105		68		(29		)	(18		)	(1		)	(1		)
Total interest and penalties in the Consolidated Balance Sheet at December 31⁽¹⁾	260		164		233			146			269			169


(1)	Includes $3 million, $3 million, and $2 million for foreign penalties in 2016, 2015 and 2014, respectively. Also includes $3 million for state penalties in 2016, 2015 and 2014.

As of December 31, 2016, 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 has concluded certain state and local tax audits. The gross uncertain tax positions at December 31, 2016 relating to such audits are $78 million. The tax benefit to continuing operations is expected to be $51 million in the first quarter of 2017.

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	2014
Mexico	2009
New York State and City	2006
United Kingdom	2014
India	2013
Singapore	2011
Hong Kong	2010
Ireland	2012

Foreign Earnings

Foreign pretax earnings approximated $11.6 billion in 2016, $11.3 billion in 2015 and $10.1 billion in 2014. As a U.S. corporation, Citigroup and its U.S. subsidiaries are currently subject to U.S. taxation on all foreign pretax earnings of 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, 2016, $47.0 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 $13.1 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 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, 2016, 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, 2016 and 2015, Citi had no valuation allowance on its DTAs. The following table summarizes Citi’s DTAs.



In billions of dollars
Jurisdiction/component	DTAs balance December 31, 2016		DTAs balance December 31, 2015
U.S. federal⁽¹⁾
Net operating losses (NOLs)⁽²⁾	$	3.5	$	3.4
Foreign tax credits (FTCs)⁽³⁾	14.2		15.9
General business credits (GBCs)	0.9		1.3
Future tax deductions and credits	21.9		20.7
Total U.S. federal	$	40.5	$	41.3
State and local
New York NOLs	$	2.2	$	2.4
Other state NOLs	0.2		0.3
Future tax deductions	1.7		1.2
Total state and local	$	4.1	$	3.9
Foreign
APB 23 subsidiary NOLs	$	0.1	$	0.2
Non-APB 23 subsidiary NOLs	0.4		0.4
Future tax deductions	1.6		2.0
Total foreign	$	2.1	$	2.6
Total	$	46.7	$	47.8


(1)	Included in the net U.S. federal DTAs of $40.5 billion as of December 31, 2016 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)

2016 consists of non-consolidated tax return NOL carry-forwards that are eventually expected to be utilized in Citigroup’s consolidated tax return. 2015 includes $0.5 billion of non-consolidated NOL carry-forwards that were used in 2016 separately from Citigroup’s consolidated tax return, and $2.9 billion of non-consolidated tax return NOL carry-forwards that are eventually expected to be utilized in Citigroup’s consolidated tax return.


(3)	Includes $1.9 billion and $1.7 billion for 2016 and 2015, 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:



In billions of dollars
Year of expiration	December 31, 2016		December 31, 2015
U.S. tax return foreign tax credit carry-forwards
2018	$	2.7	$	4.8
2019	1.3		1.2
2020	3.1		3.1
2021	1.9		1.7
2022	3.3		3.4
2023⁽¹⁾	0.5		0.4
2025⁽¹⁾	1.4		1.3
Total U.S. tax return foreign tax credit carry-forwards	$	14.2	$	15.9
U.S. tax return general business credit carry-forwards
2031	$	—	$	0.2
2032	—		0.4
2033	0.3		0.3
2034	0.2		0.2
2035	0.2		0.2
2036	0.2		—
Total U.S. tax return general business credit carry-forwards	$	0.9	$	1.3
U.S. subsidiary separate federal NOL carry-forwards
2027	$	0.2	$	0.2
2028	0.1		0.1
2030	0.3		0.3
2031	—		1.5
2033	1.7		1.7
2034	2.3		2.3
2035	3.2		3.6
2036	2.2		—
Total U.S. subsidiary separate federal NOL carry-forwards⁽²⁾	$	10.0	$	9.7
New York State NOL carry-forwards⁽²⁾
2034	$	13.0	$	14.6
New York City NOL carry-forwards⁽²⁾
2034	$	12.2	$	13.3
APB 23 subsidiary NOL carry-forwards
Various	$	0.1	$	0.2


(1)	The $1.9 billion in FTC carry-forwards that expire in 2023 and 2025 are in a non-consolidated tax return entity but are 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 foreign tax credit (FTC) component of the DTAs. Although realization is not assured, Citi believes that the realization of the recognized net DTAs of $46.7 billion at December 31, 2016 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.

Citi has concluded that it has the necessary positive evidence to support the full realization of its DTAs. Specifically, 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. In general, Citi would need to generate approximately $57 billion of U.S. taxable income during the FTC carry-forward periods to prevent this most time-sensitive component of Citi’s FTCs from expiring.

In addition to its forecasted U.S. taxable income, 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.

With respect to the FTCs component of the DTAs, the carry-forward period is 10 years. 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 $49 billion as of December 31, 2016 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 noted in the table above, Citi’s FTC carry-forwards were $14.2 billion as of December 31, 2016, compared to $15.9 billion as of December 31, 2015. This decrease represented $1.7 billion of the $1.2 billion decrease in Citi’s overall DTAs during 2016, partially offset by an increase in AOCI related DTAs. Citi believes that it will generate sufficient U.S. taxable income within the 10-year carry-forward period to be able to fully utilize the FTCs, in addition to any FTCs produced in the tax return for such period, which must be used prior to any carry-forward utilization.