INCOME TAXES

Tax Cuts and Jobs Act of 2017

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law. The Act makes broad and significantly complex changes to the U.S. corporate income tax system by, among other things; reducing the U.S. federal corporate income tax rate from 35% to 21%, transitioning U.S. international taxation to a modified territorial tax system and imposing a mandatory one-time deemed repatriation tax, payable over eight years, on accumulated undistributed foreign subsidiary earnings and profits as of December 31, 2017. Given the significant changes resulting from and complexities associated with the Act, the estimated financial impacts for Fiscal 2017 are provisional and assessed as of March 1, 2018. The ultimate outcome may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued and actions the Company may take as a result of the Act. Provisional amounts are expected to be finalized after the Company's 2017 U.S. corporate income tax return is filed in the fourth quarter of Fiscal 2018, but no later than one year from the enactment of the Act.

As a result of the Company's initial analysis of the impact of the Act, the Company incurred discrete net income tax charges of $19.9 million in Fiscal 2017, which consisted of:


•	$21.7 million of provisional tax expense related to the mandatory one-time deemed repatriation tax on accumulated undistributed foreign subsidiary earnings and profits of approximately $363.5 million;


•	$3.8 million of provisional tax expense related to the remeasurement of the Company's ending deferred tax assets and liabilities at February 3, 2018, as a result of the U.S. federal corporate income tax rate reduction from 35% to 21%; and,


•	$5.6 million of tax benefit for the decrease in its federal deferred tax liability on unremitted foreign earnings.

As a result of the provisional, mandatory one-time deemed repatriation tax, the Company has incurred federal tax on its foreign earnings as of December 31, 2017 of $21.7 million. After the utilization of existing tax credits, the Company expects U.S. federal cash tax payments of approximately $10.6 million on the mandatory one-time deemed repatriation, payable over eight years. Under a modified territorial system, future earnings are generally not subject to additional federal tax, however as discussed below, the U.S. has adopted several new tax concepts. Additionally, if funds were to be legally repatriated to the U.S. it could have implications at the state and foreign levels. Accordingly, the Company has not fully concluded on its position with respect to reinvestment of foreign earnings and whether its existing international structure for the various jurisdictions is the optimal structure for the future, but expects to complete this assessment in Fiscal 2018.

The Act includes two new U.S. tax base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions. The GILTI provisions require the Company to include foreign subsidiary earnings in excess of an allowable return on certain of the foreign subsidiary’s tangible assets in its U.S. income tax return. The Company has elected to account for GILTI tax in the period in which it is incurred and is evaluating whether it will be subject to incremental U.S. tax on GILTI income beginning in Fiscal 2018. The BEAT provisions eliminate the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. The Company does not currently expect it will be subject to this tax. Based on these expectations, the Company has not included any tax impacts of GILTI or BEAT in its consolidated financial statements as of February 3, 2018.

Components of Income Taxes

Income (loss) before taxes consisted of:



(in thousands)	Fiscal 2017			Fiscal 2016			Fiscal 2015
Domestic ⁽¹⁾	$	(12,326	)	$	(52,041	)	$	8,412
Foreign	67,487			48,563			46,178
Income (loss) before taxes	$	55,161		$	(3,478	)	$	54,590


⁽¹⁾	Includes intercompany charges to foreign affiliates for management fees, cost-sharing, royalties and interest and excludes a portion of foreign income that is currently includable on the U.S. federal income tax return.

Income tax expense (benefit) consisted of:



(in thousands)	Fiscal 2017			Fiscal 2016			Fiscal 2015
Current:
Federal	$	(218	)	$	(18,888	)	$	(3,124	)
State	1,897			(74		)	(434		)
Foreign	5,472			15,633			12,120
Total current	$	7,151		$	(3,329	)	$	8,562

Deferred:
Federal	$	23,620		$	(5,787	)	$	9,224
State	1,457			(346		)	3,297
Foreign	12,408			(1,734		)	(5,052		)
Total deferred	37,485			(7,867		)	7,469
Income tax expense (benefit)	$	44,636		$	(11,196	)	$	16,031

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



	Fiscal 2017 ⁽¹⁾		Fiscal 2016 ⁽²⁾		Fiscal 2015
U.S. federal corporate income tax rate	33.7	%	35.0	%	35.0	%
State income tax, net of U.S. federal income tax effect	3.5		5.0		4.6
Foreign taxation of non-U.S. operations	(25.8	)	248.9		(10.2	)
U.S. taxation of non-U.S. operations ⁽³⁾	17.3		(212.6	)	20.0
Net change in valuation allowances	1.0		(16.5	)	(8.7	)
Audit and other adjustments to prior years’ accruals	—		(0.1	)	(8.7	)
Statutory tax rate and law changes	(0.3	)	94.3		4.2
Permanent items	3.5		91.3		(2.6	)
Credit items	(4.2	)	11.7		(1.0	)
Tax Cuts and Jobs Act of 2017	36.1		—		—
Tax deficit recognized on share-based compensation expense⁽⁴⁾	19.2		—		—
Credit for increasing research activities	(2.3	)	32.1		(1.3	)
Trust-owned life insurance policies (at cash surrender value)	(1.9	)	31.0		(2.0	)
Other items, net	1.1		1.8		0.1
Total	80.9	%	321.9	%	29.4	%


⁽¹⁾	On December 22, 2017, the Act was signed into law, which reduced the U.S. federal corporate income tax rate from 35% to 21% resulting in a blended U.S. federal income tax rate of 33.7% based on the applicable tax rates before and after January 1, 2018, and the number of days in Fiscal 2017.

⁽²⁾

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 were amplified on a percentage basis in Fiscal 2016 even as the absolute dollar value of the reconciling items were 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.


⁽³⁾	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.

⁽⁴⁾

In Fiscal 2017, the Company adopted new share-based compensation accounting standards and in accordance with this guidance, the Company recognized $10.6 million of discrete non-cash income tax charges in Fiscal 2017 in income tax expense (benefit) on the Consolidated Statements of Operations and Comprehensive Income (Loss). Refer to Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Recent Accounting Pronouncements,” for further discussion.

Historically, jurisdictional location of pre-tax income (loss) represented a significant component of the Company’s effective tax rate as income tax rates outside the U.S. were 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 were amplified on a percentage basis at lower levels of consolidated pre-tax income (loss) in absolute dollars. As a result of the Act, the U.S. effective tax rate will be generally lower, but the effective tax rate remains dependent on jurisdictional mix. The taxation of non-U.S. operations line items 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 2017, the impact of foreign 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 NCI. For Fiscal 2017, the Company’s Swiss subsidiary earned pre-tax income of $31.6 million with a jurisdictional effective tax rate of 1.2%. For Fiscal 2017, the Company’s Hong Kong subsidiary incurred pre-tax losses of $7.4 million with a jurisdictional effective tax rate of negative 3.1%. With respect to the NCI, the subsidiaries incurred pre-tax income of $3.4 million with no jurisdictional tax effect.

For Fiscal 2016, the impact of foreign 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 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%. For Fiscal 2016, the Company’s Hong Kong subsidiary 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 foreign 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 Hong Kong subsidiary 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%.

Components of Deferred Income Tax Assets and Liabilities

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



(in thousands)	February 3, 2018			January 28, 2017
Deferred income tax assets:
Deferred compensation	$	31,567		$	54,552
Accrued expenses and reserves	13,790			13,168
Rent	29,594			33,917
Net operating losses (NOL), tax credit and other carryforwards	5,256			26,812
Investments in subsidiaries	—			8,791
Other	1,100			3,030
Valuation allowances	(3,508		)	(2,429		)
Total deferred income tax assets	$	77,799		$	137,841

Deferred income tax liabilities:
Property, equipment and intangibles	$	(2,923	)	$	(20,177	)
Inventory	(5,206		)	(11,955		)
Store supplies	(3,261		)	(4,892		)
Prepaid expenses	(1,698		)	(3,262		)
Investments in subsidiaries	(2,937		)	—
Undistributed profits of non-U.S. subsidiaries	—			(5,609		)
Other	(1,532		)	(950		)
Total deferred income tax liabilities	(17,557		)	(46,845		)
Net deferred income tax assets	$	60,242		$	90,996

Accumulated other comprehensive loss is shown net of deferred tax assets and liabilities, resulting in a deferred tax liability of $1.2 million and $0.6 million as of February 3, 2018 and January 28, 2017, respectively. Accordingly, these deferred taxes are not reflected in the table above.

As of February 3, 2018, the Company had deferred tax assets related to foreign and state NOL and credit carryforwards of $3.0 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 2020 and a portion of state NOL will begin to expire in 2021. Some foreign NOL have an indefinite carryforward period.

The Company believes it is more likely than not that NOLs and credit carryforwards will reduce future years’ tax liabilities in 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.

Other

The amount of uncertain tax positions as of February 3, 2018, January 28, 2017 and January 30, 2016, which would impact the Company’s effective tax rate if recognized and a reconciliation of the beginning and ending amounts of uncertain tax positions are as follows:



(in thousands)	Fiscal 2017			Fiscal 2016			Fiscal 2015
Uncertain tax positions, beginning of the year	$	1,239		$	2,455		$	3,212
Gross addition for tax positions of the current year	148			67			13
Gross (reduction) addition for tax positions of prior years	(1		)	19			598
Reductions of tax positions of prior years for:
Lapses of applicable statutes of limitations	(157		)	(1,211		)	(986		)
Settlements during the period	(116		)	(40		)	(64		)
Changes in judgment / excess reserve	—			(51		)	(318		)
Uncertain tax positions, end of year	$	1,113		$	1,239		$	2,455

The Internal Revenue Service (“IRS”) is currently conducting an examination of the Company’s U.S. federal income tax return for Fiscal 2017 as part of the IRS’ Compliance Assurance Process program. The IRS examinations for Fiscal 2016 and prior years have been completed. The Company has a $6.2 million carryback refund claim related to Fiscal 2016 which is pending a routine Joint Committee on Taxation review. 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 these 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.

During Fiscal 2017, the Company recognized a $0.1 million benefit related to net interest and penalties, compared to a $0.2 million benefit recognized during Fiscal 2016. Interest and penalties of $0.2 million were accrued at the end of Fiscal 2017, compared to $0.3 million accrued at the end of Fiscal 2016.