Regulatory Note: Income Tax Allocation Agreements
On April 22, 2021, the federal banking agencies proposed a rule governing income tax allocation agreements. The proposed rule would largely codify a 1998 policy statement and a 2014 addendum that provided guidance on these agreements. (1) The proposal would apply to all FDIC-insured banks and savings associations as well as to all uninsured institutions supervised by the Office of the Comptroller of the Currency (collectively, “banks”).
The proposal includes an extensive list of provisions that must be included in a tax allocation agreement. These are reproduced on the final page of this paper. For some provisions, the agencies have proposed specific language to be reproduced exactly in a tax allocation agreement; for others, a bank has limited discretion to develop substantially similar language. Accordingly, although banks often have entered into agreements that would in substance meet the proposed requirements, banks would need to compare the language of their existing agreements with the specific language in the proposed standards. A bank should additionally be aware that every entity that is part of the consolidated tax filing group that includes the bank would be required to sign the tax allocation agreement.
Two goals underlie the rulemaking. First, the rule would establish a legal basis for enforcement actions against banks with non-compliant agreements (or no agreement at all). The 1998 and 2014 guidelines were issued without notice and comment, and accordingly are not enforceable. Second, the proposal would clarify that “a parent company that receives a tax refund from a taxing authority obtains these funds as agent for the [depository institution] whose tax attributes created the tax refund.” The absence of such language has in some cases prevented the Federal Deposit Insurance Corporation acting as receiver for a failed bank from obtaining these funds from a holding company in bankruptcy.
Notably, the proposed rule adds four requirements that were not explicitly part of the earlier guidance. Two of the requirements relate to provisions in the tax allocation agreement, but two others encompass regulatory reporting. The agencies will address any changes to reporting requirements later. Under the proposal (and as recited in a staff memorandum to the Federal Reserve Board of Governors), a tax allocation agreement must require that a bank:
Be compensated when its tax assets are used to reduce the tax liability of the consolidated group.
Have access to consolidated tax returns for a consolidated group of which the depository institution is a member. (This right would extend to the FDIC acting as receiver for the bank.)
Additionally, with respect to regulatory reporting:
A bank would be required to reflect net operating losses or tax credit carryforwards on its stand-alone regulatory reporting balance sheet if those assets have not yet been absorbed by the consolidated tax filing group.
Individual deferred tax assets for temporary differences would have to be reported separately from the asset or liability that gave rise to such assets and could not be reported separately. (This prohibition aligns reporting standards with U.S. GAAP.)
The proposal would take the form of a new appendix to the safety and soundness regulations of each agency. Comments on the proposal are due within 60 days after publication of the proposal in the Federal Register.
See SR Letter 98-38 (Dec. 23, 1998); SR Letter 14-6 (July 15, 2014).