INCOME TAXES

The components of income before taxes are as follows:



	Fiscal Year Ended
	February 2, 2019		February 3, 2018		January 28, 2017
	(In thousands)
Domestic	$	49,820	$	100,288	$	90,990
Foreign	58,704		60,915		56,023
Total income before provision for income taxes	$	108,524	$	161,203	$	147,013

The components of the Company's provision for income taxes consisted of the following:



	Fiscal Year Ended
	February 2, 2019			February 3, 2018			January 28, 2017
	(In thousands)
Current:
Federal⁽¹⁾	$	594		$	31,334		$	34,056
State and local⁽¹⁾	2,519			(1,341		)	8,527
Foreign	10,019			11,618			11,473
	13,132			41,611			54,056
Deferred:
Federal	(3,418		)	30,828			(8,068		)
State and local	(2,324		)	3,546			(1,691		)
Foreign	174			520			380
	(5,568		)	34,894			(9,379		)
Total provision for income taxes	$	7,564		$	76,505		$	44,677
Effective tax rate	7.0		%	47.5		%	30.4		%

(1) The February 2, 2019 and February 3, 2018 federal, state, and local tax provision includes benefits resulting from stock-based compensation arrangements recognized under ASU 2016-09--Improvements to Employee Share Based Payment Accounting. The Company adopted ASU 2016-09 prospectively. Accordingly, no adjustments have been made for the benefits recognized for the year ended January 28, 2017. Such benefits were recorded in equity for the year ended January 28, 2017.

A reconciliation between the calculated tax provision on income based on a U.S. federal statutory rate of 21%, 34.3%, and 35% for the years ended February 2, 2019, February 3, 2018, and January 28, 2017, respectively, the effective tax rate is as follows:



	Fiscal Year Ended
	February 2, 2019			February 3, 2018			January 28, 2017
	(In thousands)
Calculated income tax provision at U.S. federal statutory rate	$	22,790		$	55,246		$	51,455
State and local income taxes, net of federal benefit ⁽¹⁾	154			1,449			4,443
Foreign tax rate differential ⁽²⁾	(3,801		)	(10,794		)	(10,116		)
Non-deductible expenses	861			514			2,514
Excess tax benefits related to stock compensation	(11,804		)	(14,665		)	—
U.S. transition taxes on deemed repatriation of foreign earnings	338			37,607			—
Revaluation of deferred tax assets and liabilities	(295		)	5,646			—
Foreign withholding and state tax on unremitted earnings	(244		)	7,483			—
Unrecognized tax benefits	1,092			(3,199		)	(1,673		)
Change in valuation allowance	(62		)	(28		)	19
Global intangible low-taxed income	1,033			—			—
Federal tax credits	(2,188		)	(1,857		)	(2,224		)
Other	(310		)	(897		)	259
Total provision for income taxes	$	7,564		$	76,505		$	44,677

(1) The total benefit from Excess tax benefit related to stock compensation for the Fiscal 2018 was $14.9 which includes $11.8 million of federal tax and $3.1 million state tax (net of federal benefit). The total benefit from Excess tax benefit related to stock compensation for the Fiscal 2017 was $16.6 which included federal tax of $14.7 million and $1.9 million of state tax (net of federal benefit).

(2) The foreign tax rate differential is due to the Company having a lower foreign effective tax rate as compared to its U.S. federal statutory tax rate of 21% for Fiscal 2018, 34.3% for Fiscal 2017, and 35% for Fiscal 2016. The Company has substantial operations in Hong Kong, which have lower statutory income tax rates as compared to the U.S. The Company's foreign effective tax rates for Fiscal 2018, Fiscal 2017, and Fiscal 2016 were 17.4% 19.9%, and 21.2%, respectively. This rate will fluctuate from year to year in response to changes in the mix of income by country as well as changes in foreign jurisdiction tax laws.

The assessment of the amount of value assigned to our deferred tax assets under the applicable accounting rules is judgmental. We are required to consider all available positive and negative evidence in evaluating the likelihood that we will be able to realize the benefit of our deferred tax assets in the future. Such evidence includes scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and the results of recent operations. Since this evaluation requires consideration of events that may occur some years into the future, there is an element of judgment involved. Realization of our deferred tax assets is dependent on generating sufficient taxable income in future periods. We believe that it is more likely than not that future taxable income will be sufficient to allow us to recover substantially all of the value assigned to our deferred tax assets. However, if future events cause us to conclude that it is not more likely than not that we will be able to recover all of the value assigned to our deferred tax assets, we will be required to adjust our valuation allowance accordingly.

The tax effects of temporary differences which give rise to deferred tax assets and liabilities are as follows:



	February 2, 2019			February 3, 2018
	(In thousands)
Noncurrent Assets:
Deferred rent	$	7,491		$	8,755
Stock-based compensation	9,321			11,500
Reserves	9,859			12,864
Inventory	3,401			2,506
Property and equipment, net	(9,288		)	(16,911		)
Prepaid expenses	(958		)	(2,613		)
Foreign and state tax on unremitted earnings	(1,806		)	(3,107		)
Hedging transactions	(270		)	(296		)
Net operating loss carryforwards and other tax credits	721			2,284
Valuation allowance	(721		)	(2,284		)
Total deferred tax asset, net	$	17,750		$	12,698

The Company has foreign net operating loss carryforwards of approximately $0.3 million, which do not expire. During Fiscal year 2018, the company liquidated certain foreign holding companies which had net operating carryforwards. While such carryforwards were written off as a result of the liquidation, there was no impact on the consolidated statement of operations as there was a full valuation allowance for the entire carryforward. The Company also has an Alternative Minimum Tax credit ("AMT") in Puerto Rico of approximately $0.6 million.

Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in assessing the need for a valuation allowance. The Company has concluded that it is more likely than not that certain deferred tax assets cannot be used in the foreseeable future, principally the foreign net operating loss carryforwards and the AMT credit in Puerto Rico. Accordingly, a valuation allowance has been established for these tax benefits. However, to the extent that tax benefits related to these are realized in the future, the reduction of the valuation allowance will reduce income tax expense accordingly.

On December 22, 2017, the U.S. government passed the Tax Act. The Tax Act is comprehensive tax legislation that implements complex changes to the U.S. tax code including, but not limited to, the reduction of the corporate tax rate from 35% to 21% and a move from a global tax regime to a modified territorial regime, which requires U.S. companies to pay a mandatory one-time transition tax on historical offshore earnings that have not been repatriated to the U.S. The transition tax is payable over eight years. The first payment was made during the first quarter of Fiscal 2018. In addition, pursuant to IRS guidance, the overpayment from the fiscal year 2017 tax return is required to be applied first toward the transition tax. Within our consolidated balance sheets, the remaining unpaid transition tax of $18.9 million is included in long-term liabilities.

Due to the complexities of the Tax Act, the SEC staff issued SAB 118 that allowed the company to record a provisional amount for any income tax effects of the Tax Act in accordance with ASC 740--Income Taxes, to the extent that a reasonable estimate can be made. SAB 118 allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. In Fiscal 2017, we recorded a provisional amount for the one-time transition tax of $37.6 million. In Fiscal 2018, we recorded an additional expense of $0.3 million as we finalized the one-time Federal transition tax which was $37.9 million. The transition tax was based on our total accumulated post-1986 prescribed foreign earnings and profits ("E&P") of $389 million, which was previously considered to be indefinitely reinvested prior to Fiscal 2017. In Fiscal 2017, we also recorded a provisional estimate of $5.7 million related to the revaluation of U.S. deferred tax assets and liabilities due to the lower enacted federal income tax rate, of 21%, that was effective January 1, 2018. A benefit of $0.3 million was recorded in Fiscal 2018, based on the finalization of the 2017 U.S. tax return which was filed in the fourth quarter of Fiscal 2018.

While the Company is no longer permanently reinvested to the extent earnings were subject to the transition tax under the Tax Act, no additional income taxes have been provided on any earnings subsequent to the transition or for any additional outside basis differences inherent in these entities, as these amounts continue to be permanently reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any additional outside basis differences in these entities (i.e., basis differences in excess of that subject to the one-time transition tax) is not practicable. The unremitted foreign earnings earned subsequent to the transition tax which are permanently reinvested are approximately $48.5 million as of February 2, 2019.

The Tax Act also includes provisions to tax global intangible low-taxed income (“GILTI”) and a base erosion and anti-abuse tax (“BEAT”) that imposes tax on certain foreign related-party payments. The Company is subject to the GILTI and BEAT provisions, which are effective January 1, 2018. The Company has included net federal and state expense of $1.4 million to reflect the impact of these new laws in the Fiscal 2018 tax provision.

The ultimate impacts of the Tax Act may differ from the estimate above, possibly materially, due to additional guidance from the U.S. government, updates or changes in the Company’s assumptions, revision of accounting standards for income taxes or related interpretations, and future information that may become available.

Uncertain Tax Benefits

Tax positions are evaluated in a two-step process. The Company first determines whether it is more-likely-than-not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold, it is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement.

A reconciliation of the gross amounts of unrecognized tax benefits, excluding accrued interest and penalties, is as follows:



	February 2, 2019			February 3, 2018
	(In thousands)
Beginning Balance	$	3,905		$	6,326
Additions for current year tax positions	1,209			1,154
Additions for prior year tax positions	101			252
Reductions for prior year tax positions	(118		)	—
Reductions related to settlements with taxing authorities	(48		)	(3,156		)
Reductions due to a lapse of the applicable statute of limitations	(44		)	(564		)
Impact of foreign currency translation	(3		)	(107		)
Ending Balance	$	5,002		$	3,905

Approximately $5.0 million of unrecognized tax benefits, excluding accrued interest and penalties, at February 2, 2019 would affect the Company's effective tax rate if recognized. The Company believes it is reasonably possible that there may be a reduction of approximately $0.4 million of unrecognized tax benefits in the next 12 months as a result of settlements with taxing authorities and statute of limitations expirations.

The Company accrued interest and penalties related to unrecognized tax benefits as part of the provision for income taxes. At February 2, 2019 and February 3, 2018, accrued interest and penalties included in unrecognized tax benefits were approximately $0.1 million and $0.1 million, respectively. Interest, penalties, and reversals, thereof, net of taxes, was a benefit of $0.1 million in Fiscal 2018, a benefit of $0.9 million in Fiscal 2017, and a benefit of $0.3 million in Fiscal 2016.

The Company is subject to tax in the United States and foreign jurisdictions, including Canada and Hong Kong. The Company, joined by its domestic subsidiaries, files a consolidated income tax return for federal income tax purposes. The Company is no longer subject to income tax examinations by U.S. federal, state and local, or foreign tax authorities for fiscal tax years 2014 and prior, with the exception of Hong Kong, which is open through fiscal tax year 2013 due to ongoing tax examination.