Income Taxes

12 Months Ended

Feb. 02, 2020

INCOME TAXES

Tax Reform

On December 22, 2017, the U.S. enacted comprehensive tax legislation with the Tax Act, making broad and complex changes to U.S. tax law, including lowering the U.S. corporate income tax rate to 21%, transitioning to a modified territorial system, and providing for current expensing of certain qualifying capital expenditures.

We have elected to pay our transition tax over the eight-year period provided in the Tax Act. As of February 2, 2020, the remaining balance of our transition tax obligation was $14 million.

The Tax Act also created a new requirement that certain income (referred to as global intangible low-taxed income or “GILTI”) earned by controlled foreign corporations, or CFCs, must be included currently in the gross income of the CFCs’ U.S. shareholder. We have elected to account for GILTI in the period the tax is incurred; as such, the Company has not recorded any GILTI-related deferred taxes.

We expect additional regulatory guidance and technical clarifications from the U.S. Department of the Treasury and IRS clarifying certain provisions of the Tax Act within the next 12 months. When additional guidance is issued, we will recognize the related tax impact in the quarter of enactment.

Provision for Income Taxes

Our earnings before the provision for income taxes follow:



in millions	Fiscal		Fiscal		Fiscal
in millions	2019		2018		2017
U.S.	$	13,770	$	13,456	$	12,682
Foreign	945		1,100		1,016
Total	$	14,715	$	14,556	$	13,698

Our provision for income taxes follows:



in millions	Fiscal			Fiscal			Fiscal
in millions	2019			2018			2017
Current:
Federal	$	2,370		$	2,495		$	4,128
State	572			544			499
Foreign	340			372			331
Total current	3,282			3,411			4,958
Deferred:
Federal	259			67			(67		)
State	(72		)	1			89
Foreign	4			(44		)	88
Total deferred	191			24			110
Provision for income taxes	$	3,473		$	3,435		$	5,068

Our combined federal, state, and foreign effective tax rates follow:



	Fiscal		Fiscal		Fiscal
	2019		2018		2017
Combined federal, state, and foreign effective tax rates	23.6	%	23.6	%	37.0	%

The reconciliation of our provision for income taxes at the federal statutory rates of 21% for fiscal 2019, 21% for fiscal 2018, and approximately 34% for fiscal 2017 to the actual tax expense follows:



in millions	Fiscal			Fiscal			Fiscal
in millions	2019			2018			2017
Income taxes at federal statutory rate	$	3,090		$	3,057		$	4,648
State income taxes, net of federal income tax benefit	395			443			369
Tax on mandatory deemed repatriation	—			(62		)	400
Other, net	(12		)	(3		)	(349		)
Total	$	3,473		$	3,435		$	5,068

Deferred Taxes

The tax effects of temporary differences that give rise to significant portions of our deferred tax assets and deferred tax liabilities follow:



in millions	February 2, 2020			February 3, 2019
Assets:
Deferred compensation	$	169		$	183
Accrued self-insurance liabilities	285			298
State income taxes	100			96
Non-deductible reserves	156			231
Net operating losses	70			17
Lease liabilities	1,536			—
Other	135			116
Total deferred tax assets	2,451			941
Valuation allowance	—			—
Total deferred tax assets after valuation allowance	2,451			941

Liabilities:
Merchandise inventories	(26		)	(9		)
Property and equipment	(1,107		)	(893		)
Goodwill and other intangibles	(195		)	(179		)
Right-of-use assets	(1,458		)	—
Other	(232		)	(230		)
Total deferred tax liabilities	(3,018		)	(1,311		)
Net deferred tax liabilities	$	(567	)	$	(370	)

Our noncurrent deferred tax assets and noncurrent deferred tax liabilities, netted by tax jurisdiction, follow:



in millions	February 2, 2020			February 3, 2019
Other assets	$	139		$	121
Deferred income taxes	(706		)	(491		)
Net deferred tax liabilities	$	(567	)	$	(370	)

We believe that the realization of the deferred tax assets is more likely than not, based upon the expectation that we will generate the necessary taxable income in future periods.

At February 2, 2020, we had federal, state, and foreign net operating loss carryforwards available to reduce future taxable income, expiring at various dates beginning in 2020 to 2038. We have concluded that it is more likely than not that the tax benefits related to the federal, state, and foreign net operating losses will be realized.

Reinvestment of Unremitted Earnings

Substantially all of our current year foreign cash flows in excess of working capital and cash needed for strategic investments are not intended to be indefinitely reinvested offshore. Therefore, the tax effects of repatriation (including applicable state and local taxes and foreign withholding taxes) of such cash flows have been provided for in the accompanying consolidated statements of earnings. We intend to reinvest substantially all of the approximately $3 billion of non-cash unremitted earnings of our non-U.S. subsidiaries indefinitely. Accordingly, no provision for state and local taxes or foreign withholding taxes was recorded on these unremitted earnings in the accompanying consolidated statements of earnings. It is impracticable for us to determine the amount of unrecognized deferred tax liabilities on these indefinitely reinvested earnings due to the complexities associated with the hypothetical calculation.

Tax Return Examination Status

Our income tax returns are routinely examined by U.S. federal, state and local, and foreign tax authorities. With few exceptions, as of February 2, 2020, the Company is no longer subject to U.S. federal examinations by tax authorities for years before fiscal 2010. Our U.S. federal tax returns for fiscal years 2010 through 2014 and 2016 to 2018 are currently under examination by the IRS. With respect to the fiscal years 2010 to 2014, the IRS has issued a proposed adjustment relating to transfer pricing between our entities in the U.S. and China. We are defending our position using all available remedies including bi-lateral relief. There are also ongoing U.S. state and local audits and other foreign audits covering fiscal years 2007 through 2018. We do not expect the results from any ongoing income tax audit to have a material impact on our consolidated financial condition, results of operations, or cash flows.

Over the next twelve months, it is reasonably possible that the resolution of federal and state tax examinations could reduce our unrecognized tax benefits by $25 million. Final settlement of these audit issues may result in payments that are more or less than this amount, but we do not anticipate the resolution of these matters will result in a material change to our consolidated financial condition or results of operations.

Unrecognized Tax Benefits

Reconciliations of the beginning and ending amount of our gross unrecognized tax benefits follow:



in millions	Fiscal			Fiscal			Fiscal
in millions	2019			2018			2017
Unrecognized tax benefits balance at beginning of fiscal year	$	494		$	637		$	659
Additions based on tax positions related to the current year	96			91			74
Additions for tax positions of prior years	82			100			15
Reductions for tax positions of prior years	(147		)	(245		)	(93		)
Reductions due to settlements	(13		)	(66		)	(1		)
Reductions due to lapse of statute of limitations	(39		)	(23		)	(17		)
Unrecognized tax benefits balance at end of fiscal year	$	473		$	494		$	637

Unrecognized tax benefits that if recognized would affect our annual effective income tax rate on net earnings were $407 million at February 2, 2020; $398 million at February 3, 2019; and $483 million at January 28, 2018.

Interest and Penalties

Net adjustments to accruals for interest and penalties associated with uncertain tax positions resulted in a benefit of $14 million in fiscal 2019, a benefit of $33 million in fiscal 2018 and expenses of $24 million in fiscal 2017. Interest and penalties are included in interest expense and SG&A, respectively.

Our total accrued interest and penalties follow:



in millions	February 2, 2020		February 3, 2019
Total accrued interest and penalties	$	87	$	101