Note 13. Income Taxes

Effective February 2, 2014, we adopted ASU No. 2013-11, Income Taxes, which clarifies the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This adoption did not have a material impact on our Consolidated Financial Statements.

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



	Fiscal Year
($ in millions)	2014		2013		2012
United States	$	1,842	$	1,817	$	1,692
Foreign	171		276		169
Income before income taxes	$	2,013	$	2,093	$	1,861

The provision for income taxes consists of the following:



	Fiscal Year
($ in millions)	2014			2013			2012
Current:
Federal	$	547		$	616		$	617
State	61			65			56
Foreign	68			63			90
Total current	676			744			763
Deferred:
Federal	70			76			(37		)
State	6			—			(6		)
Foreign	(1		)	(7		)	6
Total deferred	75			69			(37		)
Total provision	$	751		$	813		$	726

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



	Fiscal Year
	2014		2013		2012
Federal statutory tax rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal benefit	3.3		3.1		2.7
Tax impact of foreign operations	1.0		0.8		2.0
Excess foreign tax credits	(2.0	)	—		—
Other	—		(0.1	)	(0.7	)
Effective tax rate	37.3	%	38.8	%	39.0	%

In connection with a review of the Company’s overall cash position and anticipated cash needs, we made a $473 million distribution of certain foreign earnings in fiscal 2014, resulting in an overall net tax benefit of approximately $41 million. The benefit is primarily due to the recognition of foreign tax credits which exceeded the taxes due on the distribution of foreign earnings.

Deferred tax assets (liabilities) consist of the following:



($ in millions)	January 31, 2015			February 1, 2014
Gross deferred tax assets:
Deferred rent	$	162		$	147
Accrued payroll and related benefits	107			127
Nondeductible accruals	113			104
Inventory capitalization and other adjustments	63			62
Deferred income	69			28
Federal, State, and foreign net operating losses	48			45
Other	70			70
Total gross deferred tax assets	632			583
Valuation allowance	(94		)	(85		)
Total deferred tax assets, net of valuation allowance	538			498
Deferred tax liabilities:
Depreciation and amortization	(173		)	(71		)
Unremitted earnings of certain foreign subsidiaries	(56		)	(38		)
Unrealized net gain on cash flow hedges	(45		)	(17		)
Other	(3		)	(16		)
Total deferred tax liabilities	(277		)	(142		)
Net deferred tax assets	$	261		$	356
Current portion (included in other current assets)	$	142		$	179
Non-current portion (included in other long-term assets)	119			177
Total	$	261		$	356

As of January 31, 2015, we had approximately $2 million federal, $71 million state, and $171 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 $1 million for federal, $4 million for state, and $43 million for foreign as of January 31, 2015. We provided a valuation allowance of approximately $2 million and $35 million against the deferred tax assets related to the state and foreign loss carryovers, respectively. We also provided a valuation allowance of approximately $57 million related to other federal, state, and foreign deferred tax assets. The federal losses expire in fiscal 2033, the state losses expire between fiscal 2019 and fiscal 2033, approximately $77 million of the foreign losses expire between fiscal 2015 and fiscal 2034, and $94 million of the foreign losses do not expire.

In fiscal 2014, we assessed the forecasted cash needs and overall financial position of our foreign subsidiaries. As a result, we determined that approximately $155 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 we have recorded related tax expense of $28 million in fiscal 2014.

U.S. income tax has not been recognized on the excess of the amount for financial reporting over the tax basis of investments in certain foreign subsidiaries that is indefinitely reinvested outside the United States, as we intend to utilize the undistributed foreign earnings of these subsidiaries in our operations outside the United States for an indefinite period of time, primarily to support our international growth. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. The amount of such temporary differences totaled approximately $581 million as of January 31, 2015. The amount of any unrecognized deferred income tax liability on this temporary difference is estimated to be approximately $72 million.

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



	Fiscal Year
($ in millions)	2014			2013			2012
Balance at beginning of fiscal year	$	72		$	109		$	102
Increases related to current year tax positions	9			8			10
Prior year tax positions:
Increases	4			8			10
Decreases	(9		)	(47		)	(12		)
Cash settlements	(1		)	(5		)	(4		)
Expiration of statute of limitations	—			—			3
Foreign currency translation	—			(1		)	—
Balance at end of fiscal year	$	75		$	72		$	109

Of the $75 million, $72 million, and $109 million of total unrecognized tax benefits as of January 31, 2015, February 1, 2014, and February 2, 2013, respectively, approximately $31 million, $27 million, and $29 million, respectively, represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods.

During fiscal 2014, 2013, and 2012, interest expense of $2 million, $4 million, and $5 million, respectively, was recognized in the Consolidated Statements of Income relating to tax liabilities. In fiscal 2013, we also recognized an interest expense reversal of $18 million in the Consolidated Statement of Income relating to the favorable resolution of foreign tax matters. As of January 31, 2015 and February 1, 2014, the Company had total accrued interest related to the unrecognized tax benefits of $18 million and $17 million, respectively. There were no accrued penalties related to the unrecognized tax benefits as of January 31, 2015 or February 1, 2014.

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 January 31, 2015, it is reasonably possible that we will recognize a decrease in gross unrecognized tax benefits within the next 12 months of up to $5 million, primarily due to the closing of audits. If we do recognize such a decrease, the net impact on the Consolidated Statement of Income would not be material.