Note 13. Income Taxes

For financial reporting purposes, components of income before income taxes are as follows:



	Fiscal Year
($ in millions)	2013		2012		2011
United States	$	1,817	$	1,692	$	1,253
Foreign	276		169		116
Income before income taxes	$	2,093	$	1,861	$	1,369

The provision for income taxes consists of the following:



	Fiscal Year
($ in millions)	2013			2012			2011
Current:
Federal	$	616		$	617		$	419
State	65			56			37
Foreign	63			90			91
Total current	744			763			547
Deferred:
Federal	76			(37		)	14
State	—			(6		)	(6		)
Foreign	(7		)	6			(19		)
Total deferred	69			(37		)	(11		)
Total provision	$	813		$	726		$	536

Except as noted below and where required by U.S. tax law, no provision has been made for U.S. income taxes on the undistributed earnings of our foreign subsidiaries, as we intend to utilize those earnings in our foreign operations for an indefinite period of time. Such undistributed earnings and profits of foreign subsidiaries as of February 1, 2014 and February 2, 2013 were approximately $1.6 billion and $1.7 billion, respectively. Cash balances in these foreign subsidiaries are substantially lower than these undistributed earnings. If we had not intended to utilize the undistributed earnings in our foreign operations for an indefinite period of time, the deferred tax liability as of February 1, 2014 and February 2, 2013 would have been approximately $203 million and $237 million, respectively.

In fiscal 2013, we assessed the forecasted cash needs and overall financial position of our foreign subsidiaries. As a result, we determined that approximately $211 million of current year earnings was in excess of the amount we expect to utilize in certain foreign operations for an indefinite period of time, and accordingly, we have established a deferred tax liability for U.S. income taxes with respect to such earnings as of February 1, 2014 and we have recorded related tax expense of $38 million in fiscal 2013.

The difference between the effective tax rate and the U.S. federal tax rate is as follows:



	Fiscal Year
	2013		2012		2011
Federal tax rate	35.0	%	35.0	%	35.0	%
State income taxes, less federal benefit	3.1		2.7		2.2
Tax impact of foreign operations	0.8		2.0		2.1
Other	(0.1	)	(0.7	)	(0.1	)
Effective tax rate	38.8	%	39.0	%	39.2	%

Deferred tax assets (liabilities) consist of the following:



($ in millions)	February 1, 2014			February 2, 2013
Gross deferred tax assets:
Deferred rent	$	147		$	136
Accrued payroll and related benefits	127			124
Nondeductible accruals	104			79
Inventory capitalization and other adjustments	62			66
Federal, State, and foreign net operating losses ("NOLs")	45			37
Other	98			100
Total gross deferred tax assets	583			542
Valuation allowance	(85		)	(56		)
Total deferred tax assets, net of valuation allowance	498			486
Deferred tax liabilities:
Depreciation	(71		)	(14		)
Unremitted earnings of certain foreign subsidiaries	(38		)	(5		)
Other	(33		)	(40		)
Total deferred tax liabilities	(142		)	(59		)
Net deferred tax assets	$	356		$	427
Current portion (included in other current assets)	$	179		$	220
Non-current portion (included in other long-term assets)	177			207
Total	$	356		$	427

As of February 1, 2014, we had approximately $6 million federal, $66 million state, and $162 million foreign loss carryovers in multiple taxing jurisdictions that could be utilized to reduce the tax liabilities of future years. The tax-effected loss carryovers were approximately $2 million for federal, $4 million for state, and $39 million for foreign as of February 1, 2014. We provided a valuation allowance of approximately $2 million and $36 million against the deferred tax assets related to the state and foreign loss carryovers, respectively. We also provided a valuation allowance of approximately $47 million related to other federal, state, and foreign deferred tax assets. The federal losses expire between fiscal 2030 and fiscal 2033, the state losses expire between fiscal 2019 and fiscal 2032, approximately $90 million of the foreign losses expire between fiscal 2014 and fiscal 2024, and $72 million of the foreign losses do not expire.

The activity related to our unrecognized tax benefits is as follows:



	Fiscal Year
($ in millions)	2013			2012			2011
Balance at beginning of fiscal year	$	109		$	102		$	67
Increases related to current year tax positions	8			10			10
Prior year tax positions:
Increases	8			10			31
Decreases	(47		)	(12		)	(2		)
Cash settlements	(5		)	(4		)	(2		)
Expiration of statute of limitations	—			3			(1		)
Foreign currency translation	(1		)	—			(1		)
Balance at end of fiscal year	$	72		$	109		$	102

Of the $72 million, $109 million, and $102 million of total unrecognized tax benefits as of February 1, 2014, February 2, 2013, and January 28, 2012, respectively, approximately $27 million, $29 million, and $25 million (net of the federal benefit on state issues), respectively, represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. The decrease in our unrecognized tax benefits during the year was primarily attributable to the favorable resolution of foreign tax matters.

During fiscal 2013, an interest expense reversal of $18 million was recognized in the Consolidated Statement of Income relating to the favorable resolution of foreign tax matters. This was partially offset by an additional interest expense of $4 million relating to tax liabilities. During fiscal 2012 and 2011, interest expense of $5 million and $6 million, respectively, was recognized in the Consolidated Statements of Income relating to tax liabilities. As of February 1, 2014 and February 2, 2013, the Company had total accrued interest related to the unrecognized tax benefits of $17 million and $33 million, respectively. There were no accrued penalties related to the unrecognized tax benefits as of February 1, 2014 or February 2, 2013.

The Company conducts business globally, and as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, Canada, France, Hong Kong, Japan, India, and the United Kingdom. We are no longer subject to U.S. federal income tax examinations for fiscal years before 2009, and with few exceptions, we are also no longer subject to U.S. state, local, or non-U.S. income tax examinations for fiscal years before 2008.

The Company engages in continual discussions with taxing authorities regarding tax matters in the various U.S. and foreign jurisdictions. As of February 1, 2014, it is reasonably possible that we will recognize a decrease in gross unrecognized tax benefits within the next 12 month of up to $18 million, primarily due to the possible completion of several advance pricing agreements and the closing of audits. If we do recognize such a decrease, the net impact on the Consolidated Statement of Income would not be material.