INCOME TAXES

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

Income Tax Provision



In millions of dollars	2017			2016			2015
Current
Federal	$	332		$	1,016		$	861
Non-U.S.	3,910			3,585			3,397
State	269			384			388
Total current income taxes	$	4,511		$	4,985		$	4,646
Deferred
Federal	$	24,902		$	1,280		$	3,019
Non-U.S.	(377		)	53			(4		)
State	352			126			(221		)
Total deferred income taxes	$	24,877		$	1,459		$	2,794
Provision for income tax on continuing operations before non-controlling interests⁽¹⁾	$	29,388		$	6,444		$	7,440
Provision (benefit) for income taxes on discontinued operations	7			(22		)	(29		)
Income tax expense (benefit) reported in stockholders’ equity related to:
FX translation	188			(402		)	(906		)
Investment securities	(149		)	59			(498		)
Employee stock plans	(4		)	13			(35		)
Cash flow hedges	(12		)	27			176
Benefit plans	13			(30		)	(24		)
FVO DVA	(250		)	(201		)	—
Retained earnings⁽²⁾	(295		)	—			—
Income taxes before non-controlling interests	$	28,886		$	5,888		$	6,124


(1)	Includes the effect of securities transactions and other-than-temporary-impairment losses resulting in a provision (benefit) of $272 million and $(22) million in 2017, $332 million and $(217) million in 2016 and $239 million and $(93) million in 2015, respectively.


(2)	Reflects the tax effect of the accounting change for ASU 2017-08, “Premium Amortization on Purchased Callable Debt Securities”. See Note 1 to the Consolidated Financial Statements.

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:



	2017		2016		2015
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	1.1		1.8		1.7
Non-U.S. income tax rate differential	(1.6	)	(3.6	)	(4.6	)
Audit settlements⁽¹⁾	—		(0.6	)	(1.7	)
Effect of tax law changes⁽²⁾	99.7		—		0.4
Basis difference in affiliates	(2.1	)	(0.1	)	—
Tax advantaged investments	(2.2	)	(2.4	)	(1.8	)
Other, net	(0.8	)	(0.1	)	1.0
Effective income tax rate	129.1	%	30.0	%	30.0	%


(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.


(2)	For 2017, includes the $22,594 million charge for Tax Reform. 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.

As set forth in the table above, Citi’s effective tax rate for 2017 was 129.1% (29.8% before the effect of Tax Reform, about the same as the effective tax rate in 2016).

Deferred Income Taxes

Deferred income taxes at December 31 related to the following:



In millions of dollars	2017			2016
Deferred tax assets
Credit loss deduction	$	3,423		$	5,146
Deferred compensation and employee benefits	1,585			3,798
Repositioning and settlement reserves	454			1,033
U.S. tax on non-U.S. earnings	2,452			10,050
Investment and loan basis differences	3,384			5,594
Cash flow hedges	233			327
Tax credit and net operating loss carry-forwards	21,575			20,793
Fixed assets and leases	1,090			1,739
Other deferred tax assets	1,988			2,714
Gross deferred tax assets	$	36,184		$	51,194
Valuation allowance	$	9,387		$	—
Deferred tax assets after valuation allowance	$	26,797		$	51,194
Deferred tax liabilities
Intangibles	$	(1,247	)	$	(1,711	)
Debt issuances	(294		)	(641		)
Non-U.S. withholding taxes	(668		)	(739		)
Interest-related items	(562		)	(765		)
Other deferred tax liabilities	(1,545		)	(670		)
Gross deferred tax liabilities	$	(4,316	)	$	(4,526	)
Net deferred tax assets	$	22,481		$	46,668

Unrecognized Tax Benefits

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



In millions of dollars	2017			2016			2015
Total unrecognized tax benefits at January 1	$	1,092		$	1,235		$	1,060
Net amount of increases for current year’s tax positions	43			34			32
Gross amount of increases for prior years’ tax positions	324			273			311
Gross amount of decreases for prior years’ tax positions	(246		)	(225		)	(61		)
Amounts of decreases relating to settlements	(199		)	(174		)	(45		)
Reductions due to lapse of statutes of limitation	(11		)	(21		)	(22		)
Foreign exchange, acquisitions and dispositions	10			(30		)	(40		)
Total unrecognized tax benefits at December 31	$	1,013		$	1,092		$	1,235

The total amounts of unrecognized tax benefits at December 31, 2017, 2016 and 2015 that, if recognized, would affect Citi’s tax expense, are $0.8 billion, $0.8 billion and $0.9 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 Provision for income taxes.



	2017				2016				2015
In millions of dollars	Pretax		Net of tax		Pretax		Net of tax		Pretax			Net of tax
Total interest and penalties on the Consolidated Balance Sheet at January 1	$	260	$	164	$	233	$	146	$	269		$	169
Total interest and penalties in the Consolidated Statement of Income	5		21		105		68		(29		)	(18		)
Total interest and penalties on the Consolidated Balance Sheet at December 31⁽¹⁾	121		101		260		164		233			146


(1)	Includes $3 million for non-U.S. penalties in 2017, 2016 and 2015. Also includes $3 million for state penalties in 2017, 2016 and 2015.

As of December 31, 2017, 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.

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

Non-U.S. Earnings

Non-U.S. pretax earnings approximated $13.7 billion in 2017 (of which a $0.1 billion loss was recorded in Discontinued operations), $11.6 billion in 2016 and $11.3 billion in 2015. As a U.S. corporation, Citigroup and its U.S. subsidiaries are currently subject to U.S. taxation on all non-U.S. pretax earnings of a non-U.S. branch. Starting in 2018, there will be a separate foreign tax credit (FTC) basket for branches. Also starting in 2018, dividends from a non-U.S. subsidiary or affiliate are effectively exempt from U.S. taxation. The Company provides income taxes on the book over tax basis differences of non-U.S. subsidiaries except to the extent that such differences are indefinitely reinvested outside the U.S.

At December 31, 2017, $14.1 billion of basis differences of non-U.S. subsidiaries was indefinitely invested. At the existing tax rates, additional taxes (net of U.S. FTCs) of $3.5 billion would have to be provided if such basis differences were realized. These amounts are significantly less than the corresponding amounts at December 31, 2016 due to the deemed repatriation of unremitted earnings of non-U.S. subsidiaries under the provisions of Tax Reform.

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 that such amounts are distributed in excess of limits prescribed by federal law. At December 31, 2017, the amount of the base year reserves totaled approximately $358 million (subject to a tax of $75 million).

Deferred Tax Assets

As of December 31, 2017, Citi had a valuation allowance of $9.4 billion, composed of valuation allowances of $5.7 billion on its FTC carry-forwards, $2.2 billion on its U.S. residual DTA related to its non-U.S. branches, $1.4 billion on local non-U.S. DTAs and $0.1 billion on state net operating loss carry-forwards. The valuation allowance against FTCs results from the impact of the lower tax rate and the new separate FTC basket for non-U.S. branches, as well as diminished ability under Tax Reform to generate income from sources outside the U.S. to support FTC utilization. The absolute amount of Citi’s post-Tax Reform-related valuation allowances may change in future years. First, the separate FTC basket for non-U.S. branches will result in additional DTAs (for FTCs) requiring a valuation allowance, given that the local tax rate for these branches exceeds on average the U.S. tax rate of 21%. Second, in Citi’s general basket for FTCs, changes in the forecasted amount of income in U.S. locations derived from sources outside the U.S. could alter the amount of valuation allowance that is needed against such FTCs. As of December 31, 2016, Citi had no valuation allowance on its DTAs. The following table summarizes Citi’s DTAs:



In billions of dollars
Jurisdiction/component⁽¹⁾	DTAs balance December 31, 2017		DTAs balance December 31, 2016
U.S. federal⁽²⁾
Net operating losses (NOLs)⁽³⁾	$	2.3	$	3.5
Foreign tax credits (FTCs)	7.6		14.2
General business credits (GBCs)	1.4		0.9
Future tax deductions and credits	4.8		21.9
Total U.S. federal	$	16.1	$	40.5
State and local
New York NOLs	$	2.3	$	2.2
Other state NOLs	0.2		0.2
Future tax deductions	1.3		1.7
Total state and local	$	3.8	$	4.1
Non-U.S.
NOLs	$	0.6	$	0.6
Future tax deductions	2.0		1.5
Total non-U.S.	$	2.6	$	2.1
Total	$	22.5	$	46.7


(1)	All amounts are net of valuation allowances.


(2)	Included in the net U.S. federal DTAs of $16.1 billion as of December 31, 2017 were deferred tax liabilities of $2.4 billion that will reverse in the relevant carry-forward period and may be used to support the DTAs.


(3)	Consists of non-consolidated tax return NOL 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, 2017		December 31, 2016
U.S. tax return foreign tax credit carry-forwards⁽¹⁾
2018	$	0.4	$	2.7
2019	1.3		1.3
2020	3.2		3.1
2021	2.0		1.9
2022	3.4		3.3
2023⁽²⁾	0.4		0.5
2025⁽²⁾	1.4		1.4
2027⁽²⁾	1.2		—
Total U.S. tax return foreign tax credit carry-forwards	$	13.3	$	14.2
U.S. tax return general business credit carry-forwards
2032	$	0.2	$	—
2033	0.3		0.3
2034	0.2		0.2
2035	0.2		0.2
2036	0.2		0.2
2037	0.3		—
Total U.S. tax return general business credit carry-forwards	$	1.4	$	0.9
U.S. subsidiary separate federal NOL carry-forwards
2027	$	0.2	$	0.2
2028	0.1		0.1
2030	0.3		0.3
2032	0.1		—
2033	1.6		1.7
2034	2.3		2.3
2035	3.3		3.2
2036	2.1		2.2
2037	1.0		—
Total U.S. subsidiary separate federal NOL carry-forwards⁽³⁾	$	11.0	$	10.0
New York State NOL carry-forwards⁽³⁾
2034	$	13.6	$	13.0
New York City NOL carry-forwards⁽³⁾
2034	$	13.1	$	12.2
Non-U.S. NOL carry-forwards⁽¹⁾
Various	$	2.0	$	2.1


(1)	Before valuation allowance.


(2)	The $3.0 billion in FTC carry-forwards that expire in 2023, 2025 and 2027 are in a non-consolidated tax return entity but are eventually expected to be utilized (net of valuation allowances) in Citigroup’s consolidated tax return.


(3)	Pretax.

The time remaining for utilization of the FTC component has shortened, given the passage of time. Although realization is not assured, Citi believes that the realization of the recognized net DTAs of $22.5 billion at December 31, 2017 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 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. This is due to Citi’s forecast of sufficient U.S. taxable income and the fact that New York state and city continue to tax Citi’s non-U.S. income.

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 21% of foreign source taxable income in that year. However, overall domestic losses that Citi has incurred of approximately $52 billion as of December 31, 2017 are allowed to be reclassified as foreign source income to the extent of 50%–100% of domestic source income produced in subsequent years. Such resulting foreign source income would cover the FTC carry-forwards after valuation allowance. As noted in the tables above, Citi’s FTC carry-forwards were $7.6 billion ($13.3 billion before valuation allowance) as of December 31, 2017, compared to $14.2 billion as of December 31, 2016. This decrease represented $6.6 billion of the $24.2 billion decrease in Citi’s overall DTAs during 2017. Citi believes that it will generate sufficient U.S. taxable income within the 10-year carry-forward period to be able to utilize the net FTCs after the valuation allowance, in addition to any FTCs produced in the tax return for such period, which must be used prior to any carry-forward utilization.