INCOME TAXES

Income Tax Provision

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



In millions of dollars	2018			2017			2016
Current
Federal	$	834		$	332		$	1,016
Non-U.S.	4,290			3,910			3,585
State	284			269			384
Total current income taxes	$	5,408		$	4,511		$	4,985
Deferred
Federal	$	(620	)	$	24,902		$	1,280
Non-U.S.	371			(377		)	53
State	198			352			126
Total deferred income taxes	$	(51	)	$	24,877		$	1,459
Provision for income tax on continuing operations before noncontrolling interests⁽¹⁾	$	5,357		$	29,388		$	6,444
Provision (benefit) for income taxes on discontinued operations	(18		)	7			(22		)
Income tax expense (benefit) reported in stockholders’ equity related to:
FX translation	(263		)	188			(402		)
Investment securities	(346		)	(149		)	59
Employee stock plans	(2		)	(4		)	13
Cash flow hedges	(8		)	(12		)	27
Benefit plans	(20		)	13			(30		)
FVO DVA	302			(250		)	(201		)
Excluded fair value hedges	(17		)	—			—
Retained earnings⁽²⁾	(305		)	(295		)	—
Income taxes before noncontrolling interests	$	4,680		$	28,886		$	5,888


(1)	Includes the effect of securities transactions and other-than-temporary-impairment losses resulting in a provision (benefit) of $104 million and $(32) million in 2018, $272 million and $(22) million in 2017 and $332 million and $(217) million in 2016, respectively.


(2)	2018 reflects the tax effect of the accounting change for ASU 2016-16 and the tax effect of the accounting change for ASU 2018-03, to report the net unrealized gains on former AFS equity securities. 2017 reflects the tax effect of the accounting change for ASU 2017-08. 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 noncontrolling interests and the cumulative effect of accounting changes) for each of the periods indicated is as follows:



	2018		2017		2016
Federal statutory rate	21.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	1.8		1.1		1.8
Non-U.S. income tax rate differential	5.3		(1.6	)	(3.6	)
Effect of tax law changes⁽¹⁾	(0.6	)	99.7		—
Basis difference in affiliates	(2.4	)	(2.1	)	(0.1	)
Tax advantaged investments	(2.0	)	(2.2	)	(2.4	)
Other, net	(0.3	)	(0.8	)	(0.7	)
Effective income tax rate	22.8	%	129.1	%	30.0	%


(1)	2018 includes one-time Tax Reform benefits of $94 million for amounts that were considered provisional pursuant to SAB 118. 2017 includes the one-time $22,594 million charge for Tax Reform.

As set forth in the table above, Citi’s effective tax rate for 2018 was 22.8% (23.3% excluding the effect of provisional amounts pursuant to SAB 118). The rate is lower than the 29.8% reported in 2017 (excluding the one-time impact of Tax Reform) primarily due to the U.S. statutory rate reduction from 35% to 21% as part of Tax Reform.

Deferred Income Taxes

Deferred income taxes at December 31 related to the following:



In millions of dollars	2018			2017
Deferred tax assets
Credit loss deduction	$	3,419		$	3,423
Deferred compensation and employee benefits	1,975			1,585
Repositioning and settlement reserves	428			454
U.S. tax on non-U.S. earnings	2,080			2,452
Investment and loan basis differences	4,891			3,384
Cash flow hedges	240			233
Tax credit and net operating loss carry-forwards	20,759			21,575
Fixed assets and leases	1,006			1,090
Other deferred tax assets	2,145			1,988
Gross deferred tax assets	$	36,943		$	36,184
Valuation allowance	$	9,258		$	9,387
Deferred tax assets after valuation allowance	$	27,685		$	26,797
Deferred tax liabilities
Intangibles	$	(975	)	$	(1,247	)
Debt issuances	(530		)	(294		)
Non-U.S. withholding taxes	(1,040		)	(668		)
Interest-related items	(594		)	(562		)
Other deferred tax liabilities	(1,643		)	(1,545		)
Gross deferred tax liabilities	$	(4,782	)	$	(4,316	)
Net deferred tax assets	$	22,903		$	22,481

Unrecognized Tax Benefits

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



In millions of dollars	2018			2017			2016
Total unrecognized tax benefits at January 1	$	1,013		$	1,092		$	1,235
Net amount of increases for current year’s tax positions	40			43			34
Gross amount of increases for prior years’ tax positions	46			324			273
Gross amount of decreases for prior years’ tax positions	(174		)	(246		)	(225		)
Amounts of decreases relating to settlements	(283		)	(199		)	(174		)
Reductions due to lapse of statutes of limitation	(23		)	(11		)	(21		)
Foreign exchange, acquisitions and dispositions	(12		)	10			(30		)
Total unrecognized tax benefits at December 31	$	607		$	1,013		$	1,092

The total amounts of unrecognized tax benefits at December 31, 2018, 2017 and 2016 that, if recognized, would affect Citi’s tax expense, are $0.4 billion, $0.8 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 Provision for income taxes.



	2018				2017				2016
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	$	121	$	101	$	260	$	164	$	233	$	146
Total interest and penalties in the Consolidated Statement of Income	6		6		5		21		105		68
Total interest and penalties on the Consolidated Balance Sheet at December 31⁽¹⁾	103		85		121		101		260		164


(1)	Includes $2 million, $3 million and $3 million for non-U.S. penalties in 2018, 2017 and 2016. Also includes $1 million, $3 million and $3 million for state penalties in 2018, 2017 and 2016.

As of December 31, 2018, Citi was 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	2013
New York State and City	2009
United Kingdom	2015
India	2015
Singapore	2011
Hong Kong	2012
Ireland	2014

Non-U.S. Earnings

Non-U.S. pretax earnings approximated $16.1 billion in 2018 (of which a $21 million loss was recorded in Discontinued operations), $13.7 billion in 2017 and $11.6 billion in 2016. 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 non-U.S. branches. Beginning in 2018, there is a separate foreign tax credit (FTC) basket for branches. Also, 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, 2018, $15.5 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 $4.3 billion would have to be provided if such basis differences were realized.

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, 2018, 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, 2018, Citi had a valuation allowance of $9.3 billion, composed of valuation allowances of $6.0 billion on its FTC carry-forwards, $1.7 billion on its U.S. residual DTA related to its non-U.S. branches, $1.5 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 the 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. The following table summarizes Citi’s DTAs:



In billions of dollars
Jurisdiction/component⁽¹⁾	DTAs balance December 31, 2018		DTAs balance December 31, 2017
U.S. federal⁽²⁾
Net operating losses (NOLs)⁽³⁾	$	2.6	$	2.3
Foreign tax credits (FTCs)	6.8		7.6
General business credits (GBCs)	1.0		1.4
Future tax deductions and credits	6.7		4.8
Total U.S. federal	$	17.1	$	16.1
State and local
New York NOLs	$	2.0	$	2.3
Other state NOLs	0.2		0.2
Future tax deductions	1.4		1.3
Total state and local	$	3.6	$	3.8
Non-U.S.
NOLs	$	0.6	$	0.6
Future tax deductions	1.6		2.0
Total non-U.S.	$	2.2	$	2.6
Total	$	22.9	$	22.5


(1)	All amounts are net of valuation allowances.


(2)	Included in the net U.S. federal DTAs of $17.1 billion as of December 31, 2018 were deferred tax liabilities of $2.8 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, 2018		December 31, 2017
U.S. tax return foreign tax credit carry-forwards⁽¹⁾
2018	$	—	$	0.4
2019	0.9		1.3
2020	2.6		3.2
2021	1.8		2.0
2022	3.3		3.4
2023⁽²⁾	0.4		0.4
2025⁽²⁾	1.4		1.4
2027⁽²⁾	1.1		1.2
2028	1.3		—
Total U.S. tax return foreign tax credit carry-forwards	$	12.8	$	13.3
U.S. tax return general business credit carry-forwards
2032	$	—	$	0.2
2033	—		0.3
2034	—		0.2
2035	—		0.2
2036	0.1		0.2
2037	0.4		0.3
2038	0.5		—
Total U.S. tax return general business credit carry-forwards	$	1.0	$	1.4
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		0.1
2033	1.6		1.6
2034	2.1		2.3
2035	3.3		3.3
2036	2.1		2.1
2037	1.0		1.0
Unlimited carry-forward period	1.7		—
Total U.S. subsidiary separate federal NOL carry-forwards⁽³⁾	$	12.5	$	11.0
New York State NOL carry-forwards⁽³⁾
2034	$	11.7	$	13.6
New York City NOL carry-forwards⁽³⁾
2034	$	11.5	$	13.1
Non-U.S. NOL carry-forwards⁽¹⁾
Various	$	2.0	$	2.0


(1)	Before valuation allowance.


(2)	The $2.9 billion in FTC carry-forwards that expire in 2023, 2025 and 2027 are in a non-consolidated tax return entity but will 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 $22.9 billion at December 31, 2018 is more-likely-than-not, based upon expectations as to future taxable income in the jurisdictions in which the DTAs arise and consideration of available tax planning strategies (as defined in ASC 740, Income Taxes).

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 $47 billion as of December 31, 2018 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 $6.8 billion ($12.8 billion before valuation allowance) as of December 31, 2018, compared to $7.6 billion as of December 31, 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, after considering any FTCs produced in the tax return for such period, which must be used prior to any carry-forward utilization.