OFFICIAL SEAL OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

OFFICIAL LETTERHEAD STATIONERY 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

WASHINGTON, D.C. 20551 

ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD 

October 25, 2005 

Carl V. Howard, Esq. 

General Counsel – Bank Regulatory 

Citigroup Inc. 

425 Park Avenue 

New York, NY 10043 

Dear Mr. Howard: 

This is in response to the request by Citigroup Inc. (“Citigroup”), New York, 

New York, for an exemption from section 23A of the Federal Reserve Act and the 

Board’s Regulation W that would permit certain Australian Regulation W 

operating subsidiaries of Citibank, N.A. (“Citibank”), also in New York (the “Bank 

Chain Companies”), to enter into a tax-sharing agreement with certain Australian 

Regulation W affiliates of Citibank (the “Nonbank Chain Companies” and, 

together with the Bank Chain Companies, the “Group Companies”). [Begin 

Footnote 1. 12 U.S.C. section 371c; 12 CFR part 223. End Footnote 1.] 

Background and Legal Framework 

You have represented that, under Australian tax law, a group of affiliated 

Australian companies may choose to consolidate for Australian income tax 

purposes by electing a head company that is primarily liable for the Australian 

income tax for the entire group. Under such an arrangement, group companies 

other than the head company are not required to make separate payments of 

income tax to the Australian tax authority; rather, they pay income tax through the 

designated head company. If the head company does not pay the group’s 

consolidated taxes, however, each group company is jointly and severally liable for 

the group’s consolidated tax liability unless the group companies enter into a taxsharing agreement. A tax-sharing agreement may limit the liability of each group 

company to its allocable share of the group’s consolidated tax liability. 
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Citigroup has elected to consolidate the Group Companies for Australian 

income tax purposes, and the Bank Chain Companies have entered into a taxsharing agreement with the Nonbank Chain Companies. Under the tax-sharing 

agreement, a particular Bank Chain Company (the “Head Company”) would 

become liable to the Australian tax authority for the consolidated tax obligations of 

the Group Companies. Under the arrangement, each Group Company would be 

required to pay to the Head Company (several days in advance of the tax due date) 

an amount equal to its allocable share of the group’s consolidated tax liability. 

These payments, in turn, would be promptly paid by the Head Company to the 

Australian tax authority. The Head Company would be liable to the Australian tax 

authority for the consolidated tax obligations of the group regardless of whether 

any or all of the Group Companies paid their allocable shares of taxes to the Head 

Company. The tax-sharing agreement could be terminated by the Head Company 

upon notice to the other parties to the agreement. 

Section 23A and Regulation W limit the aggregate amount of “covered 

transactions” between a bank (including its operating subsidiaries) and any single 

affiliate to 10 percent of the bank’s capital stock and surplus, and limit the 

aggregate amount of covered transactions with all affiliates to 20 percent of the 

bank’s capital stock and surplus. [Begin Footnote 2. 12 U.S.C. section 

371c(a)(1) and 12 CFR 223.11 and 223.12. End Footnote 2.] “Covered 

transactions” include, among other things, the extension of credit by a bank to 

an affiliate and the issuance by a bank of a guarantee on behalf of an affiliate. 

[Begin Footnote 3. 12 U.S.C. section 371c(b)(7) and 12 CFR 223.3(h). End 

Footnote 3.] In addition, the statute and rule require a bank to secure its 

extensions of credit to, and guarantees on behalf of, affiliates with prescribed 

amounts of collateral. [Begin Footnote 4. 12 U.S.C. section 371c(c) and 

12 CFR 223.14. End Footnote 4.] 

The tax-sharing arrangement creates a guarantee by Citibank on behalf of an 

affiliate – a covered transaction that is subject to the quantitative limits and 

collateral requirements of section 23A and Regulation W – because a Bank Chain 

Company would become liable to the Australian tax authority for the consolidated 

tax obligations of the Group Companies (including Nonbank Chain Companies). 

Citibank’s guarantee is unlimited in amount, and, accordingly, the covered 

transaction would exceed the Regulation W quantitative limits for the bank. 
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Section 23A and Regulation W authorize the Board to exempt, at its 

discretion, a transaction or relationship from the requirements of the statute and 

the regulation if the Board finds the exemption to be in the public interest and 

consistent with the purposes of section 23A. [Begin Footnote 5. 12 U.S.C. 

section 371c(f)(2) and 12 CFR 223.43. End Footnote 5.] As noted above, 

Citigroup has requested an exemption for the tax-sharing arrangement. 

The Exemption 

After reviewing the matter, and in light of the circumstances and 

commitments described in this letter and in the Attachment, the Board believes that 

granting the exemption would be appropriate. Citigroup has structured the taxsharing arrangement to minimize any potential losses that the Head Company (and 

hence Citibank) may suffer as a result of the failure of a Nonbank Chain Company 

to pay its allocable share of the Australian tax liabilities of the Group Companies. 

Under the arrangement, each Group Company must make any required Australian 

tax payment to the Head Company before the Head Company is required to pay the 

Group Companies’ consolidated tax liability to the Australian tax authority. In 

addition, Citigroup has guaranteed the tax-payment obligations of the Nonbank 

Chain Companies to the Head Company. 

Moreover, the tax-sharing arrangement is structured to provide more 

benefits to the Bank Chain Companies than the Nonbank Chain Companies. 

Importantly, Bank Chain Companies are able to use tax losses of the Nonbank 

Chain Companies without compensating the Nonbank Chain Companies, while the 

Nonbank Chain Companies are able to use tax losses of the Bank Chain 

Companies only if Citigroup makes prompt compensation to the Bank Chain 

Companies for the value of the tax losses. In addition, Citigroup has committed to 

consult with Federal Reserve staff if there are changes in the Australian tax code 

that materially affect the tax-sharing arrangement. The Board expects Citigroup to 

comply fully with Australian tax law; the Board, however, takes no position on 

whether Citigroup’s tax-sharing arrangement complies with Australian tax law. 

Citigroup has explained that making a Nonbank Chain Company the Head 

Company, which would eliminate the covered transaction created by the taxsharing arrangement, would also eliminate several benefits of the arrangement for 

both Citigroup and Citibank. Among the reasons why Citigroup has selected a 

Bank Chain Company to be the Head Company are (i) Australian tax rules provide 
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substantive and procedural advantages to consolidated tax groups that have a 

depository institution as their head company; (ii) Citigroup’s designated Head 

Company is its primary financial services platform in Australia, and Citigroup is 

therefore likely to avoid the burdensome process of replacing its Head Company 

with another Group Company; and (iii) selecting a Bank Chain Company to be the 

Head Company would allow the Bank Chain Companies to use some pre-existing 

positive tax attributes of the Nonbank Chain Companies for the benefit of 

Citigroup and Citibank. 

Granting the requested exemption would have public benefits. The 

exemption would assist Citigroup in reducing its Australian income tax burden 

consistent with other financial services firms operating in Australia and thus would 

help Citigroup remain a competitive provider of financial services to Australian 

consumers and businesses. In addition, Citibank would continue to be subject to 

the market-terms requirement of section 23B of the Federal Reserve Act with 

respect to the tax-sharing arrangement. Section 23B requires that the arrangement 

be on terms that are substantially the same, or at least as favorable to the bank, as 

those that the bank would in good faith offer to nonaffiliates. [Begin Footnote 6. 

See 12 U.S.C. section 371c-1(a)(1); 12 CFR 223.51. End Footnote 6.] 

Conclusion 

In light of these considerations and all the facts presented, the tax-sharing 

arrangement appears to be consistent with safe and sound banking practices and 

the purposes of section 23A. Accordingly, the Board hereby grants the requested 

exemption, subject to the conditions and limits discussed above. 

This determination is specifically conditioned on compliance by Citigroup 

and Citibank with all the commitments and representations made in connection 

with the exemption request, including the commitments set forth in the 

Attachment. These commitments and representations are deemed to be conditions 

imposed in writing by the Board in connection with granting the request and, as 

such, may be enforced in proceedings under applicable law. This determination is 

based on the specific facts and circumstances of the tax-sharing arrangement 

described in your correspondence and this letter. Any material change in those 

facts and circumstances or any failure by Citigroup or Citibank to observe any of 
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its commitments or representations may result in a different determination or in 

revocation of the exemption. 

Very truly yours, 

[signed] 

Robert deV. Frierson 

Deputy Secretary of the Board 

Attachment 

cc: Federal Reserve Bank of New York 

Office of the Comptroller of the Currency 

Federal Deposit Insurance Corporation 
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Attachment 

In support of the proposed tax-sharing arrangement among its Australian 

subsidiaries (the “Arrangement”), Citigroup has made the following commitments: 

1. With respect to the Arrangement, Citigroup commits that appropriate cash 

payments on behalf of the nonbank affiliates will be made to the designated 

Head Company prior to the Head Company making any estimated or final 

tax payments to the Australian tax authorities. These cash payments may be 

made by the nonbank affiliates themselves or by other affiliate that is not a 

U.S. depository institution or a Regulation W operating subsidiary of a U.S. 

depository institution (a “corporate chain affiliate”), including Citigroup. In 

addition, Citigroup commits to guarantee the payment by a nonbank affiliate 

of any tax-related obligation to a subsidiary in Australia that is a Regulation W 

operating subsidiary of Citibank, N.A. (a “bank chain entity”). 

2. With respect to these financial transactions, Citigroup commits that any bank 

chain entity that permits an existing tax benefit to be used by a nonbank affiliate 

in order to reduce Citigroup's consolidated tax exposure in Australia shall 

promptly be compensated in cash by Citigroup, a corporate chain affiliate, the 

nonbank affiliate, or another nonbank affiliate for the amount of reduced tax 

liability realized by the nonbank affiliate from the bank chain entity’s tax 

benefit. Citigroup recognizes that prompt compensation means reimbursement 

within 30 days of the relevant consolidated tax return being filed in Australia. 

The reimbursement would be made to the affected bank chain entity or to 

Citibank, N.A. 

3. Citigroup commits to consult with Federal Reserve staff regarding possible 

changes to the Arrangement, in the event that bank chain entities participating 

in the Arrangement generate less than 50 percent of the consolidated Australian 

tax liability for two consecutive years, or in the event that there are changes in 

the Australian Tax Code that materially affect the Arrangement. 

4. Citigroup agrees that these commitments are deemed to be conditions imposed 

in writing in connection with the Federal Reserve System's findings and 

decision on Citigroup’s request for an exemption from section 23A of the 

Federal Reserve Act with respect to the Arrangement and, as such, may be 

enforced in proceedings under applicable law.