INCOME TAXES

Income (loss) before taxes was comprised of:



(in thousands)	Fiscal 2016			Fiscal 2015		Fiscal 2014
Domestic	$	(52,041	)	$	8,412	$	100,115
Foreign	48,563			46,178		(961		)
Income (loss) before taxes	$	(3,478	)	$	54,590	$	99,154

Domestic (loss) income above includes intercompany charges to foreign affiliates for management fees, cost-sharing, royalties and interest, but does not include a portion of foreign income that is currently includable on the U.S. federal income tax return.

Income tax (benefit) expense consisted of:



(in thousands)	Fiscal 2016			Fiscal 2015			Fiscal 2014
Current:
Federal	$	(18,888	)	$	(3,124	)	$	21,287
State	(74		)	(434		)	1,944
Foreign	15,633			12,120			28,614
	(3,329		)	8,562			51,845
Deferred:
Federal	(5,787		)	9,224			8,971
State	(346		)	3,297			1,783
Foreign	(1,734		)	(5,052		)	(15,266		)
	(7,867		)	7,469			(4,512		)
Income tax (benefit) expense	$	(11,196	)	$	16,031		$	47,333

Reconciliation between the statutory federal income tax rate and the effective tax rate is as follows:



	Fiscal 2016⁽¹⁾		Fiscal 2015		Fiscal 2014
U.S. Federal income tax rate	35.0	%	35.0	%	35.0	%
State income tax, net of U.S. federal income tax effect	5.0		4.6		4.3
Foreign taxation of non-U.S. operations	248.9		(10.2	)	5.4
U.S. taxation of non-U.S. operations⁽²⁾	(212.6	)	20.0		—
Net change in valuation allowances	(16.5	)	(8.7	)	6.6
Audit and other adjustments to prior years’ accruals	(0.1	)	(8.7	)	(1.3	)
Statutory tax rate and law changes	94.3		4.2		0.2
Permanent items	122.3		(4.6	)	(1.1	)
Credit items	43.8		(2.3	)	(1.2	)
Other items, net	1.8		0.1		(0.2	)
Total	321.9	%	29.4	%	47.7	%

⁽¹⁾

Given the low level of income in absolute dollars in Fiscal 2016, effective tax rate reconciling items that may have been considered de minimis in prior years in terms of absolute dollars and on a percentage basis are amplified on a percentage basis in the current year even as the absolute dollar value of the reconciling items are similar to prior years. Accordingly, year over year comparability may be difficult as a result of the amplifying effect of the lower levels of income.


⁽²⁾	U.S. branch operations in Canada and Puerto Rico are subject to tax at the full U.S. tax rates. As a result, income from these operations do not create reconciling items.

The jurisdictional location of pre-tax income (loss) may represent a significant component of the Company’s effective tax rate as income tax rates outside the U.S. are generally lower than the U.S. statutory income tax rate. Furthermore, the impact of changes in the jurisdictional location of pre-tax income (loss) on the Company’s effective tax rate will be amplified on a percentage basis at lower levels of consolidated pre-tax income (loss) in absolute dollars. The taxation of non-U.S. operations line item in the table above excludes items related to the Company’s non-U.S. operations reported separately in the appropriate corresponding line items.

For Fiscal 2016, the impact of taxation of non-U.S. operations on the Company's effective income tax rate was primarily related to the Company's Swiss and Hong Kong subsidiaries, along with the Company's Non-Controlling Interest (NCI). For Fiscal 2016, the Company’s Swiss subsidiary earned pre-tax income of $18.7 million with a jurisdictional effective tax rate of negative 11.0%. Hong Kong incurred pre-tax losses of $12.6 million with a jurisdictional effective tax rate of negative 4.5%. With respect to the NCI, the subsidiaries incurred pre-tax income of $3.8 million with no jurisdictional tax effect.

For Fiscal 2015, the impact of taxation of non-U.S. operations on the Company’s effective income tax rate was primarily related to the Company’s subsidiaries in Australia, Switzerland and Hong Kong. For Fiscal 2015, the Company’s Australian subsidiary incurred pre-tax losses of $4.9 million, with no jurisdictional tax effect, related to the closure of the Company’s Australian operations. For Fiscal 2015, the Company’s Swiss subsidiary earned pre-tax income of $1.9 million with a jurisdictional effective tax rate of negative 745%. The Swiss jurisdictional effective tax rate included the impact of the Company’s omnichannel restructuring as well as the release of a valuation allowance. For Fiscal 2015, the Company’s subsidiary in Hong Kong incurred pre-tax losses of $6.8 million with a jurisdictional effective tax rate of 15.8%, slightly below the statutory tax rate of 16.5%.

For Fiscal 2014, the impact of taxation of non-U.S. operations on the Company’s effective income tax rate was primarily related to the Company’s Australian and Swiss subsidiaries. For Fiscal 2014, the Company’s Australian subsidiary incurred pre-tax losses of $8.4 million with a jurisdictional effective tax rate of negative 5.6%. The Australian jurisdictional effective tax rate included the impact of the closure of the Company’s Australian operations. For Fiscal 2014, the Company’s Swiss subsidiary incurred pre-tax losses of $2.6 million with a jurisdictional effective tax rate of negative 218.4%. The Swiss jurisdictional effective tax rate included the impact of the establishment of a valuation allowance.

The effect of temporary differences which gives rise to deferred income tax assets (liabilities) were as follows:



(in thousands)	January 28, 2017			January 30, 2016
Deferred tax assets:
Deferred compensation	$	54,552		$	62,679
Accrued expenses and reserves	13,168			19,862
Rent	33,917			36,929
Net operating losses (NOL), tax credit and other carryforwards	26,812			14,248
Investments in subsidiaries	8,791			2,895
Other	3,030			619
Valuation allowances	(2,429		)	(1,643		)
Total deferred tax assets	$	137,841		$	135,589
Deferred tax liabilities:
Property, equipment and intangibles	$	(20,177	)	$	(20,708	)
Inventory	(11,955		)	(9,480		)
Store supplies	(4,892		)	(6,054		)
Prepaid expenses	(3,262		)	(3,653		)
Undistributed net income of non-U.S. subsidiaries	(5,609		)	(4,390		)
Other	(950		)	(1,011		)
Total deferred tax liabilities	(46,845		)	(45,296		)
Net deferred income tax assets	$	90,996		$	90,293

Accumulated other comprehensive loss is shown net of deferred tax assets and deferred tax liabilities, resulting in a deferred tax liability of $0.6 million and $1.7 million as of January 28, 2017 and January 30, 2016, respectively. Accordingly, these deferred taxes are not reflected in the table above.

As of January 28, 2017, the Company had deferred tax assets related to foreign and state NOL carryforwards of $14.9 million and $1.2 million, respectively, that could be utilized to reduce future years’ tax liabilities. If not utilized, a portion of the foreign NOL carryovers will begin to expire in 2017 and a portion of state NOL will begin to expire in 2021. Some foreign NOL have an indefinite carryforward period.

As of January 28, 2017, the Company had deferred tax assets related to foreign tax credit carryforwards of approximately $7 million that could be utilized to reduce future years’ tax liabilities. If not utilized, the credit carryforwards will begin to expire in 2027. The utilization of credit carryforwards may be limited in a given year.

The Company believes it is more likely than not that NOLs, charitable contributions carryforwards and credit carryforwards would reduce future years’ tax liabilities in the U.S., various states and certain foreign jurisdictions less any associated valuation allowance. All valuation allowances have been reflected through the Consolidated Statements of Operations and Comprehensive Income (Loss). No other valuation allowances have been provided for deferred tax assets because management believes that it is more likely than not that the full amount of the net deferred tax assets will be realized in the future. While the Company does not expect material adjustments to the total amount of valuation allowances within the next 12 months, changes in assumptions may occur based on the information then currently available. In such case, the Company will record an adjustment in the period in which a determination is made.

A reconciliation of the beginning and ending amounts of uncertain tax positions is as follows:



(in thousands)	Fiscal 2016			Fiscal 2015			Fiscal 2014
Uncertain tax positions, beginning of the year	$	2,455		$	3,212		$	4,182
Gross addition for tax positions of the current year	67			13			152
Gross addition for tax positions of prior years	19			598			33
Reductions of tax positions of prior years for:
Lapses of applicable statutes of limitations	(1,211		)	(986		)	(348		)
Settlements during the period	(40		)	(64		)	(4		)
Changes in judgment/ excess reserve	(51		)	(318		)	(803		)
Uncertain tax positions, end of year	$	1,239		$	2,455		$	3,212

Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The amount recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement. The Company’s effective tax rate includes the impact of reserve provisions and changes to reserves on uncertain tax positions that are not more likely than not to be sustained upon examination as well as related interest and penalties.

A number of years may elapse before a particular matter, for which the Company has established a reserve, is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes that its reserves reflect the probable outcome of known tax contingencies. Unfavorable settlement of any particular issue would require use of the Company’s cash. Favorable resolution would be recognized as a reduction to the Company’s effective tax rate in the period of resolution.

The amount of the above uncertain tax positions at January 28, 2017, January 30, 2016 and January 31, 2015, which would impact the Company’s effective tax rate if recognized, was $1.2 million, $2.5 million and $3.2 million, respectively.

The Company recognizes accrued interest and penalties related to uncertain tax positions as a component of income tax expense. During Fiscal 2016, the Company recognized a $0.2 million benefit related to net interest and penalties, compared to a $0.9 million benefit recognized during Fiscal 2015. Interest and penalties of $0.3 million were accrued at the end of Fiscal 2016, compared to $0.5 million accrued at the end of Fiscal 2015.

The Internal Revenue Service (“IRS”) is currently conducting an examination of the Company’s U.S. federal income tax return for Fiscal 2016 as part of the IRS’ Compliance Assurance Process program. The IRS examinations for Fiscal 2015 and prior years have been completed and settled. State and foreign returns are generally subject to examination for a period of three to five years after the filing of the respective return. The Company has various state and foreign income tax returns in the process of examination, administrative appeals or litigation. The outcome of the examinations is not expected to have a material impact on the Company’s financial statements. The Company believes that some of these audits and negotiations will conclude within the next 12 months and that it is reasonably possible the amount of uncertain income tax positions, including interest, may change by an immaterial amount due to settlements of audits and expiration of statutes of limitations.

The Company does not expect material adjustments to the total amount of uncertain tax positions within the next 12 months, but the outcome of tax matters is uncertain and unforeseen results can occur.

As of January 28, 2017, a provision for U.S. income tax has not been recorded on approximately $126.6 million of unremitted income generated through the third quarter of Fiscal 2015 of non-U.S. subsidiaries that the Company has determined to be indefinitely reinvested outside the U.S. The potential U.S. deferred income tax liability if the foreign net income were to be repatriated in the future, net of any foreign income or withholding taxes previously paid, is approximately $25 million. The Company has recorded $5.6 million of deferred U.S. income taxes on $27.3 million of net income generated after October 31, 2015, which is not considered to be invested indefinitely.