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INCOME TAXES

12 Months Ended

Feb. 01, 2020

Tax Cuts and Jobs Act of 2017

In December 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law. The Act made 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 related to the enactment of the Act, for Fiscal 2017 and up to one year from the enactment of the Act, were provisional and subject to further analysis, interpretation and clarification of the Act. The Company updated its interpretations and assumptions, which resulted in changes to these initial estimates during Fiscal 2018. The Company completed its accounting related to the Act in the fourth quarter of Fiscal 2018.

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. In Fiscal 2018, the Company recognized measurement period charges of $3.5 million, primarily due to regulatory guidance issued by the Internal Revenue Service (the “IRS”).

As a result of the Company’s initial analysis of the impact of the Act and subsequent measurement period adjustments, the Company incurred discrete net income tax charges in an aggregate amount of $16.5 million, which consisted of:


•	$23.7 million of tax expense related to the mandatory one-time deemed repatriation tax on accumulated undistributed foreign subsidiary earnings and profits of approximately $385.8 million;


•	$5.6 million of tax benefit for the decrease in the Company’s federal deferred tax liability on unremitted foreign earnings;


•	$6.0 million of net tax benefit for adjustments to deferred taxes resulting from an international tax restructuring of foreign operations completed in response to the Act;


•	$3.5 million of tax expense related to the remeasurement of the Company’s ending deferred tax assets and deferred tax liabilities at February 3, 2018, as a result of the U.S. federal corporate income tax rate reduction from 35% to 21%; and,


•	$0.8 million of tax expense at the state level related to the Company’s decision to repatriate $250 million of the Company’s undistributed foreign earnings to the U.S. in the fourth quarter of Fiscal 2018.

Swiss Tax Reform

In May 2019, Switzerland voted to approve the Federal Act on Tax Reform and AHV Financing (“Swiss Tax Reform”), effective at the federal level beginning January 2020, which resulted in the abolishment of preferential tax regimes by the cantons. In addition to the abolishment of the preferential tax regimes, the cantons needed to implement new, mandatory tax provisions in their cantonal tax law which were subject to a referendum process as well. As a result of these changes and actions taken by the Company, both of which occurred in the third quarter, the Company increased its deferred income tax assets and liabilities, which are recorded on the Consolidated Balance Sheets within other assets and other liabilities, respectively, by $38.0 million during the third quarter of Fiscal 2019. In the fourth quarter of Fiscal 2019, the canton of Ticino formally enacted the tax reform effective January 1, 2020. As a result, the tax reform entered into force on January 1, 2020. The Company decreased its deferred income tax assets and liabilities by $13.1 million during the fourth quarter of Fiscal 2019 for a net increase of deferred income tax assets and liabilities during Fiscal 2019 of $24.9 million as a result of Swiss Tax Reform. In addition, the Company incurred tax benefits of $2.9 million as a result of Swiss Tax Reform. Swiss Tax Reform did not have a material impact to the Consolidated Statements of Operations and Comprehensive Income or the Company’s cash flows during the period.

Components of income taxes

Income (loss) before income taxes consisted of:



(in thousands)	Fiscal 2019		Fiscal 2018		Fiscal 2017
Domestic ⁽¹⁾	$	17,590	$	53,858	$	(12,326	)
Foreign	44,741		62,509		67,487
Income before income taxes	$	62,331	$	116,367	$	55,161


⁽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 consisted of:



(in thousands)	Fiscal 2019			Fiscal 2018			Fiscal 2017
Current:
Federal	$	(2,193	)	$	7,460		$	(218	)
State	1,893			3,645			1,897
Foreign	8,521			20,508			5,472
Total current	$	8,221		$	31,613		$	7,151

Deferred:
Federal ⁽¹⁾	$	29,012		$	5,319		$	23,620
State	(107		)	1,183			1,457
Foreign ⁽¹⁾	(19,755		)	(556		)	12,408
Total deferred	9,150			5,946			37,485
Income tax expense	$	17,371		$	37,559		$	44,636


⁽¹⁾	As a result of Swiss Tax Reform, Fiscal 2019 federal deferred tax expense included charges of $24.9 million and foreign deferred tax expense included benefits of $24.9 million.

During Fiscal 2018, the Company repatriated $250 million of the Company’s foreign earnings and profits to the U.S. The Company has determined that the remaining balance of the Company’s undistributed earnings and profits from its foreign subsidiaries are considered indefinitely reinvested outside of the U.S. As a result of both the mandatory one-time deemed repatriation and the adoption of a modified territorial system under the Act, these earnings and profits could be repatriated without incurring additional federal income tax. If additional funds were to be repatriated to the U.S., the Company could incur an insignificant amount of state income taxes and foreign withholding taxes.

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



	Fiscal 2019		Fiscal 2018		Fiscal 2017 ⁽¹⁾
U.S. federal corporate income tax rate	21.0	%	21.0	%	33.7	%
Net change in valuation allowances	8.2		0.7		1.0
Foreign taxation of non-U.S. operations ⁽²⁾	5.5		(0.9	)	(23.7	)
Write-off of stock basis in subsidiary	3.2		—		—
Internal Revenue Code Section 162(m)	2.2		1.0		—
State income tax, net of U.S. federal income tax effect	1.9		3.6		3.5
Audit and other adjustments to prior years’ accruals, net	0.8		(0.1	)	—
Permanent items	0.3		0.2		3.5
Statutory tax rate and law changes due to Swiss Tax Reform	(4.6	)	—		—
Credit for increasing research activities	(3.6	)	(1.7	)	(2.3	)
Net income attributable to noncontrolling interests	(1.9	)	(0.8	)	(2.1	)
Additional U.S. taxation of non-U.S. operations	(1.4	)	5.1		17.3
Trust-owned life insurance policies (at cash surrender value)	(1.1	)	(0.6	)	(1.9	)
Other statutory tax rate and law changes	(0.9	)	(0.1	)	(0.3	)
Tax expense (benefit) recognized on share-based compensation expense⁽³⁾	(0.9	)	8.3		19.2
Credit items	(0.8	)	(0.6	)	(4.2	)
Tax Cuts and Jobs Act of 2017	—		(3.0	)	36.1
Other items, net	—		0.2		1.1
Total	27.9	%	32.3	%	80.9	%


⁽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⁾	Prior to 2019, U.S. branch operations in Canada and Puerto Rico were subject to tax at the full U.S. tax rates. As a result, income from these operations do not create reconciling items. Effective in 2019, only Puerto Rico continues to be a branch of the U.S.


⁽³⁾	Refer to Note 14, “SHARE-BASED COMPENSATION,” for details on discrete income tax benefits and charges related to share-based compensation awards during Fiscal 2019, Fiscal 2018, and Fiscal 2017.

Historically, prior to the passage of the Tax Cuts and Jobs Act of 2017 (“Act”), the 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 was amplified on a percentage basis at lower levels of consolidated pretax 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 2019, the impact of taxation of non-U.S. operations on the Company's effective income tax rate was primarily related to the Company's Japan subsidiary, along with the Company’s NCI. For Fiscal 2019, the Company’s Japan subsidiary earned pre-tax income of $12.0 million with a jurisdictional effective tax rate of 35.1%. With respect to the NCI, the subsidiary incurred pre-tax income of $5.6 million with no jurisdictional tax effect. The Swiss earnings are subject to U.S. tax and the effect is included in the U.S. taxation of non-U.S. operations above.

For Fiscal 2018, 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 subsidiary, along with the Company’s NCI. For Fiscal 2018, the Company’s Swiss subsidiary earned pre-tax income of $24.9 million with a jurisdictional effective tax rate of 12.9%. With respect to the NCI, the subsidiaries incurred pre-tax income of $4.3 million with no jurisdictional tax effect. The Swiss earnings are subject to U.S. tax and the effect is included in the U.S. taxation of non-U.S. operations above.

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 SAR of China 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 SAR of China 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.

Components of deferred income tax assets and deferred income tax liabilities

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



(in thousands)	February 1, 2020			February 2, 2019
Deferred income tax assets:
Operating lease liabilities ⁽¹⁾	$	370,068		$	—
Intangibles, foreign step-up in basis ⁽²⁾	77,565			52,615
Deferred compensation	19,849			22,341
Accrued expenses and reserves	13,571			12,767
Net operating losses (NOL), tax credit and other carryforwards	13,204			8,195
Rent	2,727			27,299
Prepaid expenses	1,246			—
Investments in subsidiaries	—			1,988
Other	3,613			1,012
Valuation allowances	(8,916		)	(5,402		)
Total deferred income tax assets	$	492,927		$	120,815

Deferred income tax liabilities:
Operating lease right-of-use assets ⁽¹⁾	$	(319,005	)	$	—
U.S. offset to foreign step-up in basis ⁽²⁾	(77,565		)	(52,615		)
Property, equipment and intangibles	(17,236		)	(4,769		)
Inventory	(3,537		)	(6,937		)
Store supplies	(2,843		)	(2,998		)
U.S. offset to foreign deferred tax assets, excluding intangibles, foreign step-up in basis ⁽²⁾	(1,654		)	—
Prepaid expenses	—			(2,564		)
Undistributed profits of non-U.S. subsidiaries	(587		)	—
Other	(488		)	(660		)
Total deferred income tax liabilities	$	(422,915	)	$	(70,543	)
Net deferred income tax assets ⁽³⁾	$	70,012		$	50,272


⁽¹⁾	Refer to Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Recent accounting pronouncements,” for further discussion of the new lease accounting standard’s impact on the consolidated financial statements.

⁽²⁾

The deferred tax asset relates to a step-up in basis associated with the intra-entity transfer of intangible assets to Switzerland which are being amortized for Swiss local tax purposes. As this subsidiary’s income is also taxable in the U.S., a corresponding U.S. deferred tax liability was recognized to reflect lower resulting foreign tax credit due to the amortization of the Swiss step-up in basis. Included in the liability section is the remaining portion of deferred tax liabilities which are properly categorized in the table above.


⁽³⁾	This table does not reflect deferred taxes classified within accumulated other comprehensive loss. As of February 1, 2020, accumulated other comprehensive loss included an insignificant amount of deferred tax liabilities. As of February 2, 2019, accumulated other comprehensive loss included deferred tax liabilities of $0.3 million.

As of February 1, 2020, the Company had deferred tax assets related to federal, foreign and state NOL and credit carryforwards of $2.0 million, $9.5 million and $1.4 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 2023. Some foreign NOLs 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 and any changes in corresponding deferred tax liabilities have been reflected through the Consolidated Statements of Operations and Comprehensive Income. 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. Changes in assumptions may occur based on new information that becomes 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 1, 2020, February 2, 2019 and February 3, 2018, which would impact the Company’s effective tax rate if recognized and a reconciliation of the beginning and ending amounts of uncertain tax positions, excluding accrued interest and penalties, are as follows:



(in thousands)	Fiscal 2019			Fiscal 2018			Fiscal 2017
Uncertain tax positions, beginning of the year	$	478		$	1,113		$	1,239
Gross addition for tax positions of the current year	131			151			148
Gross addition (reduction) for tax positions of prior years	1,349			(3		)	(1		)
Reductions of tax positions of prior years for:
Lapses of applicable statutes of limitations	(151		)	(218		)	(157		)
Settlements during the period	(13		)	(16		)	(116		)
Changes in judgment / excess reserve	—			(549		)	—
Uncertain tax positions, end of year	$	1,794		$	478		$	1,113

The IRS is currently conducting an examination of the Company’s U.S. federal income tax return for Fiscal 2019 as part of the IRS’ Compliance Assurance Process program. The IRS examinations for Fiscal 2018 and prior years have been completed. 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 settlement of audits and expiration of statues 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.

Refer to Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Income taxes,” for discussion regarding significant accounting policies related to the Company’s income taxes.