Income Taxes

Current income tax expense represents the amounts expected to be reported on the Company’s income tax returns, and deferred tax expense or benefit represents the change in net deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered likely to be realized.

On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted into law. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The TCJA reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. The ultimate impact may differ from provisional amounts, due to changes in interpretations and assumptions the Company has made regarding application of the TCJA as well as additional regulatory guidance that may be issued. The Company recognized $159 million tax benefit related to revaluing the ending net deferred tax liabilities and recognized $67 million of tax expense related to the deemed mandatory repatriation in its consolidated financial statements for the year ended February 3, 2018. As of February 2, 2019, the Company has completed its determination of the accounting implications of the TCJA.

The following table provides the components of the Company’s provision for income taxes for fiscal 2018, 2017 and 2016:



	2018			2017			2016
	(in millions)
Current:
U.S. Federal	$	212		$	366		$	345
U.S. State	37			49			62
Non-U.S.	16			22			21
Total	265			437			428
Deferred:
U.S. Federal	(4		)	(114		)	99
U.S. State	2			6			8
Non-U.S.	(50		)	—			3
Total	(52		)	(108		)	110
Provision for Income Taxes	$	213		$	329		$	538

The non-U.S. component of pre-tax income, arising principally from overseas operations, was a loss of $14 million, income of $99 million and income of $134 million for 2018, 2017 and 2016, respectively.

The following table provides the reconciliation between the statutory federal income tax rate and the effective tax rate for fiscal 2018, 2017 and 2016:



	2018		2017		2016
Federal Income Tax Rate	21.0	%	33.7	%	35.0	%
State Income Taxes, Net of Federal Income Tax Effect	6.0	%	3.6	%	3.4	%
Impact of Non-U.S. Operations	0.8	%	(1.5	%)	(1.2	%)
Divestiture of La Senza	(2.7	%)	—	%	—	%
U.S. Net Deferred Tax Liability Remeasurement	—	%	(12.1	%)	—	%
Deemed Mandatory Repatriation	—	%	5.1	%	—	%
Share-Based Compensation	1.0	%	(1.0	%)	—	%
Uncertain Tax Positions	(0.5	%)	(1.2	%)	(4.1	%)
Other Items, Net	(0.7	%)	(1.5	%)	(1.4	%)
Effective Tax Rate	24.9	%	25.1	%	31.7	%

Deferred Taxes

The following table provides the effect of temporary differences that cause deferred income taxes as of February 2, 2019 and February 3, 2018. 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, 2019									February 3, 2018
	Assets			Liabilities			Total			Assets			Liabilities			Total
	(in millions)
Operating Loss Carryforwards	$	217		$	—		$	217		$	202		$	—		$	202
Non-qualified Retirement Plan	64			—			64			62			—			62
Leases	50			—			50			47			—			47
Share-based Compensation	47			—			47			46			—			46
Deferred Revenue	28			—			28			15			—			15
Property and Equipment	—			(278		)	(278		)	—			(266		)	(266		)
Trade Names and Other Intangibles	—			(93		)	(93		)	—			(91		)	(91		)
Other Assets	—			(60		)	(60		)	—			(60		)	(60		)
Other, Net	60			(27		)	33			57			(24		)	33
Valuation Allowance	(172		)	—			(172		)	(212		)	—			(212		)
Total Deferred Income Taxes	$	294		$	(458	)	$	(164	)	$	217		$	(441	)	$	(224	)

As of February 2, 2019, the Company had available for state income tax purposes net operating loss carryforwards which expire, if unused, in the years 2019 through 2037. 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.

As of February 2, 2019, the Company had available for non-U.S. tax purposes net operating loss carryforwards which have an indefinite life and net operating loss carryforwards which expire, if unused, in the years 2028 through 2038. For certain jurisdictions where the Company has determined that it is more likely than not that the net operating loss carryforwards will not be realized, a valuation allowance has been provided on those net operating loss carryforwards as well as other net deferred tax assets.

Income tax payments were $324 million for 2018, $494 million for 2017 and $469 million for 2016.

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 2018, 2017 and 2016, without interest and penalties:



	2018			2017			2016
	(in millions)
Gross Unrecognized Tax Benefits, as of the Beginning of the Fiscal Year	$	67		$	90		$	248
Increases to Unrecognized Tax Benefits for Prior Years	35			3			3
Decreases to Unrecognized Tax Benefits for Prior Years	(25		)	(22		)	(73		)
Increases to Unrecognized Tax Benefits as a Result of Current Year Activity	44			7			18
Decreases to Unrecognized Tax Benefits Relating to Settlements with Taxing Authorities	—			(2		)	(98		)
Decreases to Unrecognized Tax Benefits as a Result of a Lapse of the Applicable Statute of Limitations	(7		)	(9		)	(8		)
Gross Unrecognized Tax Benefits, as of the End of the Fiscal Year	$	114		$	67		$	90

Of the $114 million, $67 million and $90 million of total unrecognized tax benefits at February 2, 2019, February 3, 2018, and January 28, 2017, respectively, approximately $104 million, $46 million and $62 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 $84 million could change in the next 12 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 an income tax benefit from interest and penalties of $5 million, $2 million and $3 million in 2018, 2017 and 2016, respectively. The Company has accrued $12 million and $17 million for the payment of interest and penalties as of February 2, 2019 and February 3, 2018, 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. The Company is a participant in the Compliance Assurance Process ("CAP"), which is a program made available by the Internal Revenue Service ("IRS") to certain qualifying large taxpayers, under which participants work collaboratively with the IRS to identify and resolve potential tax issues through open, cooperative and transparent interaction prior to the annual filing of their federal income tax return. The IRS is currently examining the Company's 2017 consolidated U.S. federal income tax return.

The Company is also subject to various U.S. state and local income tax examinations for the years 2012 to 2017. Finally, the Company is subject to multiple non-U.S. tax jurisdiction examinations for the years 2007 to 2017. 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.