Income Taxes

The following table provides the components of the Company’s provision for income taxes for 2012, 2011 and 2010:



	2012			2011			2010
	(in millions)
Current:
U.S. Federal	$	432		$	357		$	406
U.S. State	67			46			54
Non-U.S.	18			11			10
Total	517			414			470
Deferred:
U.S. Federal	14			6			(20		)
U.S. State	4			1			(3		)
Non-U.S.	(7		)	(44		)	(1		)
Total	11			(37		)	(24		)
Provision for Income Taxes	$	528		$	377		$	446

The Non-U.S. component of pre-tax income, arising principally from overseas operations, was income of $1 million for 2012, a loss of $37 million for 2011 and income of $42 million for 2010. The 2012 income included the impact of the $93 million impairment of goodwill and other intangible assets at La Senza. The 2011 loss included the impact of the $232 million impairment of goodwill and other intangible assets at La Senza as well as the Non-U.S. portion of the gain on the divestiture of the third-party apparel sourcing business of $105 million.

The 2011 Non-U.S. deferred benefit of $44 million is primarily the result of the reversal of a deferred tax liability associated with the La Senza trade name established upon the acquisition of La Senza.

The Company's income taxes payable has been reduced by the excess tax benefits from employee stock plan awards. For stock options, the Company receives an excess income tax benefit calculated as the tax effect of the difference between the fair market value of the stock at the time of grant and exercise. For restricted stock, the Company receives an excess income tax benefit calculated as the tax effect of the difference between the fair market value of the stock at the time of grant and vesting. The Company had net excess tax benefits from equity awards of $116 million, $48 million and $19 million in 2012, 2011 and 2010, respectively, which were reflected as increases to equity.

The following table provides the reconciliation between the statutory federal income tax rate and the effective tax rate for 2012, 2011 and 2010:



	2012		2011		2010
Federal Income Tax Rate	35.0	%	35.0	%	35.0	%
State Income Taxes, Net of Federal Income Tax Effect	4.0	%	4.0	%	3.5	%
Express Charitable Contribution	—	%	(5.0	)%	—	%
Deductible Loss on Divestiture of Limited Stores	—	%	—	%	(2.4	)%
Non-deductible Impairment of Goodwill and Other Intangible Assets	2.4	%	4.3	%	—	%
Non-U.S. Portion of the Divestiture of Third-party Apparel Sourcing Business	—	%	(3.0	)%	—	%
Impact of Non-U.S. Operations	1.1	%	(2.2	)%	0.5	%
Other Items, Net	(1.3	)%	(2.4	)%	(1.0	)%
Effective Tax Rate	41.2	%	30.7	%	35.6	%

No deferred tax liability is currently recorded on Non-U.S. affiliated earnings as the tax basis is greater than the carrying value on those Non-U.S. affiliates.

Deferred Taxes

The following table provides the effect of temporary differences that cause deferred income taxes as of February 2, 2013 and January 28, 2012. Deferred tax assets and liabilities represent the future effects on income taxes resulting from temporary differences and carryforwards at the end of the respective year.



	February 2, 2013									January 28, 2012
	Assets			Liabilities			Total			Assets			Liabilities			Total
	(in millions)
Leases	$	43		$	—		$	43		$	45		$	—		$	45
Non-qualified Retirement Plan	86			—			86			82			—			82
Property and Equipment	—			(190		)	(190		)	—			(190		)	(190		)
Goodwill	—			(15		)	(15		)	—			(15		)	(15		)
Trade Names and Other Intangibles	—			(138		)	(138		)	—			(139		)	(139		)
Charitable Contribution Carryforwards	—			—			—			23			—			23
State Net Operating Loss Carryforwards	23			—			23			26			—			26
Non-U.S. Operating Loss Carryforwards	151			—			151			40			—			40
Valuation Allowance	(171		)	—			(171		)	(59		)	—			(59		)
Other, Net	67			—			67			55			—			55
Total Deferred Income Taxes	$	199		$	(343	)	$	(144	)	$	212		$	(344	)	$	(132	)

As of February 2, 2013, the Company had available for state income tax purposes net operating loss carryforwards which expire, if unused, in the years 2013 through 2028. The Company has analyzed the realization of the state net operating loss carryforwards on an individual state basis. For those states where the Company has determined that it is more likely than not that the state net operating loss carryforwards will not be realized, a valuation allowance has been provided for the deferred tax asset.

As of February 2, 2013, the Company had available for non-U.S. tax purposes net operating loss carryforwards which expire, if unused, in the years 2027 through 2032. The Company has determined that it is more likely than not that all of the net operating loss carryforwards will not be realized and a valuation allowance has been provided for the net deferred tax assets, including the net operating loss carryforwards, of the related tax loss entities.

Income tax payments were $336 million for 2012, $400 million for 2011 and $376 million for 2010.

Uncertain Tax Positions

The following table summarizes the activity related to the Company’s unrecognized tax benefits for U.S. federal, state & non-U.S. tax jurisdictions for 2012, 2011 and 2010, without interest and penalties:



	2012			2011			2010
	(in millions)
Gross Unrecognized Tax Benefits, as of the Beginning of the Fiscal Year	$	146		$	147		$	115
Increases in Unrecognized Tax Benefits for Prior Years	13			4			17
Decreases in Unrecognized Tax Benefits for Prior Years	(19		)	(33		)	(17		)
Increases in Unrecognized Tax Benefits as a Result of Current Year Activity	52			45			40
Decreases to Unrecognized Tax Benefits Relating to Settlements with Taxing Authorities	(1		)	(9		)	(2		)
Decreases to Unrecognized Tax Benefits as a Result of a Lapse of the Applicable Statute of Limitations	(6		)	(8		)	(6		)
Gross Unrecognized Tax Benefits, as of the End of the Fiscal Year	$	185		$	146		$	147

Of the $185 million, $146 million and $147 million of total unrecognized tax benefits at February 2, 2013, January 28, 2012, and January 29, 2011, respectively, approximately $160 million, $131 million and $130 million, respectively, represent the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. These amounts are net of the offsetting tax effects from other tax jurisdictions.

Of the total unrecognized tax benefits, it is reasonably possible that $135 million could change in the next twelve months due to audit settlements, expiration of statute of limitations or other resolution of uncertainties. Due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in amounts which could be different from this estimate. In such case, the Company will record additional tax expense or tax benefit in the period in which such matters are effectively settled.

The Company recognizes interest and penalties related to unrecognized tax benefits as components of income tax expense. The Company recognized interest and penalties expense of $1 million in 2012, benefit of $7 million in 2011 and expense of $2 million in 2010. The Company has accrued approximately $26 million, $25 million and $32 million for the payment of interest and penalties as of February 2, 2013, January 28, 2012, and January 29, 2011, respectively. Accrued interest and penalties are included within Other Long-term Liabilities on the Consolidated Balance Sheets.

The Company files U.S. federal income tax returns as well as income tax returns in various states and in non-U.S. jurisdictions. At the end of 2012, the Company was subject to examination by the IRS for 2009 through 2011. The Company is also subject to various U.S. state and local income tax examinations for the years 2004 to 2011. Finally, the Company is subject to multiple non-U.S. tax jurisdiction examinations for the years 2002 to 2011. In some situations, the Company determines that it does not have a filing requirement in a particular tax jurisdiction. Where no return has been filed, no statute of limitations applies. Accordingly, if a tax jurisdiction reaches a conclusion that a filing requirement does exist, additional years may be reviewed by the tax authority. The Company believes it has appropriately accounted for uncertainties related to this issue.