Insight: Why Citi wants to rack up U.S. taxes

Tue Jun 18, 2013 1:09am EDT
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By Dan Wilchins

(Reuters) - Over the past few years, Citigroup Inc has been grappling with an unusual problem - how to incur more U.S. taxes.

The third-largest U.S. bank tried to buy the foundering Wachovia Corp in the fall of 2008 in part because the deal would have brought it more taxable domestic income, a person familiar with the matter said.

In February this year, it agreed to buy a portfolio of about $7 billion in credit card loans to Best Buy Co Inc customers from Capital One Financial Corp - and taxes played a role in the bank's decision to do the deal, Chief Executive Michael Corbat said in March.

Citigroup is even reclassifying overseas profit as money that it might bring back to the United States, an odd move in an era in which many American companies try to keep much of their foreign income abroad to avoid paying higher U.S. taxes on the profits.

The bank is not feeling generous — it is just looking to use up $55 billion of tax credits and deductions, known as deferred tax assets, as of the end of March.

It had accumulated them from losses and foreign tax payments largely during and after the financial crisis. About 95 percent of these future tax benefits are in the United States.

Realizing these benefits over time could be worth some $27 billion to Citigroup today, or about $9 per share for a stock that trades at around $50 a share, according to John McDonald, a veteran bank analyst at Sanford C. Bernstein.

Using all these assets will free up more than $40 billion, about one-third, of the bank's capital. Citigroup could then return more capital to shareholders through stock-boosting moves like share buybacks.   Continued...

Raindrops are pictured on a signboard of Citibank at its branch in Tokyo, February 23, 2009. REUTERS/Kim Kyung-Hoon