On April 22, 2021, the Federal Reserve Board, FDIC and OCC (the “Agencies”) Posted a notice of proposed regulation which would require banks that file income tax returns under a consolidated income tax reporting group to enter into income tax attribution agreements with their parent companies and other members of the consolidated group that are attach to the filing, and would establish specific requirements for the content of these agreements. The proposal would apply to all insured deposit-taking institutions and uninsured OCC-chartered institutions that are not registered as subchapter S companies (collectively, “covered institutions”).
The proposal follows the agencies’ 1998 policy statement on the same subject, which the agencies updated in a 2014 policy statement. These policy statements were intended to address the uncertainty regarding the ownership of income tax refunds that may arise for insured deposit-taking institutions filing as part of a consolidated tax group, in particular to avoid disputes over such ownership. in the event of bank failure. Through the policy statements, the agencies “encouraged” insured depositories to enter into tax allocation agreements with their parent companies and other affiliates to clarify the ownership of refunds and provide the institution with no less treatment. favorable only if she had filed her income tax return. as a separate entity. When publishing the proposal, the agencies noted that, because the policy statements are not binding, not all institutions have complied. In some cases, the FDIC, as the receiver of a failing insured depository institution, has been unable to recover disputed tax refund payments from the institution’s parent company when the entities failed. have not entered into a tax allocation agreement contemplated in the policy statements. The agencies also observed that the inability of an institution to obtain compensation for the use by its affiliates of its tax assets could create problems of security and soundness.
The proposal seeks to address these issues by codifying a requirement that a covered institution must enter into a written and comprehensive tax allocation agreement with its parent company and other affiliates if these entities report income taxes as a consolidated group. . The tax allocation agreement should be approved by the boards of directors of each covered institution in the consolidated group and its holding company, which, according to the preamble, is intended to ensure the enforceability of the agreement.
The tax allocation agreement would be necessary to cover the allocation, timing and payment of taxes by a consolidated group, including its treatment of deferred tax assets and liabilities. Among other things, the agreement would be required to provide that:
- the target institution will not make any tax payments to its affiliates in excess of what its tax liability would be for the current period if it were calculated on a separate basis for the entity;
- the target institution will not make tax payments to its affiliates until the time when the institution would have been obligated to pay the tax administration if it had filed a return on a separate entity basis;
- the covered institution will promptly receive any tax refund attributable to the institution’s tax assets;
- if the target institution had received a refund from the tax administration if it had been filed with a separate entity, but it is not possible to obtain an actual refund because other members of the consolidated group have incurred losses that offset the separate tax liability of the institution for the previous year, the institution will obtain at least its autonomous repayment amount from the parent company no later than the date on which the institution would have filed its own declaration if it had produced a separate entity; and
- the covered institution will be remunerated for the use of its tax assets when the asset concerned is used by the consolidated group.
In addition, a tax allocation agreement should contain specific language providing that refunds attributable to the tax assets of a covered institution belong to the institution, and that if the relevant tax authority issues such refunds to the parent company of the institution. As an institution, the parent company will hold these funds in trust as an agent of the branch and promptly remits the funds to the branch.
While the proposal generally follows prudential expectations set out in existing policy statements, its demands would go further in several ways:
- While the proposal does not affect the existing obligations of a covered institution subject to a consolidated tax agreement to prepare regulatory reports on a separate entity basis, it would dictate how to report certain tax assets with greater specificity than policy statements. First, it would require a covered institution to reflect in its autonomous regulatory reporting balance sheet all net operating losses or carryforwards of tax credits not yet absorbed by its consolidated tax group. Second, the proposal would prohibit a covered institution from reporting its individual deferred tax assets for temporary differences separately from the asset or liability giving rise to those assets.
- The proposal would require that a covered institution be indemnified for the use of its tax assets to reduce the tax debt of the consolidated tax group.
- The proposal would require the tax allocation agreement to provide that the target institution and its successors have access to tax documents for its consolidated tax group, including consolidated tax returns and working papers.
- The proposal would apply not only to insured deposit-taking institutions, but also to uninsured institutions regulated by the OCC, such as national trust companies, even if uninsured institutions are neither subject to the receivership of the OCC. FDIC nor in Sections 23A and 23B of the Federal Reserve Act.
The preamble to the proposal states that only a small number of institutions in consolidated groups do not have tax allocation agreements that would already comply with the terms of the proposal, so the agencies “expect that most of the institutions covered are already in compliance with the proposal ”.
Comments on the proposal will be expected 60 days after publication in the Federal Register.