The US government quietly agreed to forgo about $38 billion in potential tax payment from troubled financial giant Citigroup as part of a deal that help the company repay bailout funds, a media report has said.
"The federal government quietly agreed to forgo billions of dollars in potential tax payments from Citigroup as part of the deal announced this week to wean the company from the massive taxpayer bailout that helped it survive the financial crisis," the 'Washington Post' reported.
The government had injected $45 billion in the entity, hit by global financial crisis in 2008. Citi has to pay back $20 billion bailout money to the US government, since the government got a 34 per cent stake in Citi for $25 billion.
According to the publication, the Internal Revenue Service (IRS) on Friday issued an exception to long-standing tax rules for the benefit of Citigroup and a few other companies partially owned by the government.
The move would allow Citigroup to retain $38 billion tax breaks that otherwise would decline in value when the government sells its stake to private investors.
The decision essentially gave up a longstanding rule that disqualified certain tax breaks if a significant ownership stake changed hands in an effort to discourage outside investors from buying tax benefits.
The IRS, an arm of the Treasury Department, has changed a number of rules during the financial crisis to reduce the tax burden on financial firms, the daily said.
"This rule was designed to stop corporate raiders from using loss corporations to evade taxes, and was never intended to ddress the unprecedented situation where the government owned shares in banks," Treasury spokeswoman Nayyera Haq said.
"And it was certainly not written to prevent the government from selling its shares for a profit," Haq added.
The daily said that precise value of the IRS ruling depends on Citigroup's future profitability and other factors, but citing two accounting experts the Washington Post said it was fair to estimate that Citigroup would save at least several billion dollars as a result.
At the end of the third quarter, Citigroup said that the value of its past losses was about $38 billion, allowing it to avoid taxes on its next $38 billion in profits, but under normal IRS rules, a change in control would sharply reduce the amount of profits that Citigroup could shelter from taxes in any given year.
As per the deal on Monday, Citi said it would sell $17 billion of common stock and about $3.5 billion of securities that turn into common shares in three years, which will help the bank repay the bailout money.
