The moves helped the company focus on core customer groups and boost capital to conform to shifting international rules, Moynihan has said. His predecessor, Kenneth D. Lewis, spent more than $130 billion for acquisitions that gave Bank of America leading positions in deposits, credit cards, mortgages and investment banking.
Gains, Losses
Outside the U.S., some of those businesses may have recorded gains with attached foreign tax credits and others may have had losses. When combined, they may have created a situation in which the bank received relatively little net income and was able to obtain the foreign tax credits.
As a simplified example, if the company had $100 of income in a country with a 20 percent tax rate, it would have a $20 foreign tax credit and would still have to pay $15 in tax to the U.S. if the profits were repatriated.
If that income were combined with $90 of losses, then the company would have $10 of income to repatriate and a U.S. tax liability of $3.50. The company would still have paid $20 in taxes, creating $16.50 of excess foreign tax credits.
The bank can start using the foreign tax credits it has stockpiled only after it generates enough U.S. taxable income to exhaust its net operating loss deductions. Deductions are subtractions from taxable income. Credits, which are typically more valuable, offset tax payments.
10-Year Clock
The transactions started a 10-year clock, after which the tax credits expire.
“What you want to make sure is you always get to fully utilize all those foreign tax credits,” Shackelford said.
The loss carry-forwards start expiring after 2027 and the foreign tax credits begin expiring after 2017, according to securities filings. The filings show that Bank of America has taken a $271 million valuation allowance against the foreign tax credits, which means that executives think it is likely that the company will generate enough income to use up almost all of the credits before they expire.