Domestic pre-tax income includes the results of non-U.S. businesses that are operated in branches owned directly by the U.S. which, therefore, are subject to U.S. income tax.

Public Law 115-97, informally known as the Tax Cuts and Jobs Act (the “Tax Act”), was enacted on December 22, 2017. The Tax Act lowered the U.S. statutory income tax rate from 35 percent to 21 percent, imposed a one-time transition tax on our foreign earnings, which previously had been deferred from U.S. income tax, and created a modified territorial system. During the fourth quarter of 2017, we recognized a $99 million provisional charge for the mandatory deemed repatriation of foreign sourced net earnings and a corresponding change in the permanent reinvestment assertion under ASC 740-30. During 2018, we finalized our assessment of the income tax effects of the Tax Act and included measurement period adjustments that reduced the provisional amounts by $28 million.

The Tax Act included a provision effective in 2018 to tax global intangible low-taxed income (“GILTI”) of our foreign subsidiaries. We treat GILTI tax as a current period expense. The GILTI tax expense for 2019 and 2018 was not significant.

Following enactment of the Tax Act and the one-time transition tax, our historical foreign earnings are not subject to additional U.S. federal tax upon repatriation. Further, no additional U.S. federal tax will be due upon repatriation of current foreign earnings because they are either exempt or subject to U.S. tax as earned. At February 1, 2020, we had accumulated undistributed foreign earnings of approximately $704 million. This amount consists of historical earnings that were previously taxed under the Tax Act and post-Tax Act earnings. Investments in our foreign subsidiaries, including working capital, will continue to be permanently reinvested. Cash balances in excess of working capital needs are considered to be available for repatriation to the United States and foreign withholding taxes will be accrued as necessary on these amounts. We have not recorded a deferred tax liability for the difference between the financial statement carrying amount and the tax basis of our investments in foreign subsidiaries. The determination of any unrecorded deferred tax liability on this amount is not practicable due to the uncertainty of how these investments would be recovered.

A reconciliation of the significant differences between the federal statutory income tax rate and the effective income tax rate on pre-tax income is as follows:

(1)	In accordance with Section 15 of the Internal Revenue Code, the tax rate for 2017 represented a blended rate of 33.7 percent, calculated by applying a prorated percentage of the number of days prior to and subsequent to the January 1, 2018 effective date.

Deferred income taxes are provided for the effects of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. Items that give rise to significant portions of our deferred tax assets and liabilities are as follows:


	2019		2018
Deferred tax assets:	($ in millions)
Tax loss/credit carryforwards and capital loss	$	54	$	39
Employee benefits		40		38
Property and equipment		30		35
Goodwill and other intangible assets		14		24
Operating leases - liabilities		844		—
Straight-line rent		—		47
Other		29		25
Total deferred tax assets	$	1,011	$	208
Valuation allowance		(39)		(33)
Total deferred tax assets, net	$	972	$	175
Deferred tax liabilities:
Merchandise inventories	$	86	$	77
Operating leases - assets		794		—
Other		13		17
Total deferred tax liabilities	$	893	$	94
Net deferred tax asset	$	79	$	81
Balance Sheet caption reported in:
Deferred taxes	$	81	$	87
Other liabilities		(2)		(6)
	$	79	$	81

Based upon the level of historical taxable income and projections for future taxable income, which are based upon our long-range strategic plans, we believe it is more likely than not that we will realize the benefits of deductible differences, net of the valuation allowances at February 1, 2020, over the periods in which the temporary differences are anticipated to reverse. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised. As of February 1, 2020, we have a valuation allowance of $39 million to reduce our deferred tax assets to an amount that is more likely than not to be realized. A valuation allowance of $36 million was recorded against tax loss carryforwards of certain foreign entities. Based on the history of losses and the absence of prudent and feasible business plans for generating future taxable income in these entities, we believe it is more likely than not that the benefit of these loss carryforwards will not be realized. As of February 1, 2020, a valuation allowance of $2 million was established for foreign taxes assessed at rates in excess of the U.S. federal tax rate for which no U.S. foreign tax credit is available. Additionally, since we do not have any reasonably foreseeable sources of Canadian capital gains, a valuation allowance of $1 million was established during 2019 for a deferred tax asset arising from a capital loss associated with an uncollectible Canadian note receivable.

At February 1, 2020, we have international minimum tax credit carryforwards with a potential tax benefit of $4 million and operating loss carryforwards with a potential tax benefit of $41 million, a portion of which will expire between 2020 and 2027 and a portion of which will never expire. We will have, when realized, capital losses with a potential benefit of $1 million arising from a Canadian note receivable and $2 million from a minority interest investment. The Canadian loss will carryforward indefinitely after realization and the minority interest loss can be carried forward five years after realization. The international operating loss carryforwards do not include unrecognized tax benefits. We also have foreign tax credit carryforwards with a potential tax benefit of $6 million that will expire between 2018 and 2029.

We operate in multiple taxing jurisdictions and are subject to audit. Audits can involve complex issues that may require an extended period of time to resolve. A taxing authority may challenge positions we adopted in our income tax filings. Accordingly, we may apply different tax treatments for transactions in filing our income tax returns than for income tax financial reporting. We regularly assess our tax positions for such transactions and record reserves for those differences.

Our 2018 U.S. Federal income tax filing is under examination by the Internal Revenue Service. We expect to conclude the examination in the first quarter of 2020. We are participating in the IRS’s Compliance Assurance Process (“CAP”) for 2019, which is expected to conclude during 2020. We have started the CAP for 2020. We are subject to state and local tax examinations from 2015 to the present. To date, no adjustments have been proposed in any audits that will have a material effect on our financial position or results of operations.

At February 1, 2020, we had $45 million of gross unrecognized tax benefits, of which $34 million would, if recognized, affect our annual effective tax rate. We classified certain income tax liabilities as current or noncurrent based on our estimate of when these liabilities will be settled. Interest expense and penalties related to unrecognized tax benefits are classified as income tax expense. The Company recognized $1 million of interest expense in 2019. Interest was not significant for 2018 or 2017. The total amount of accrued interest and penalties was $2 million, $1 million, and none in 2019, 2018, and 2017, respectively.

The following table summarizes the activity related to unrecognized tax benefits:


	2019		2018		2017
	($ in millions)
Unrecognized tax benefits at beginning of year	$	34	$	44	$	38
Foreign currency translation adjustments		(1)		(3)		4
Increases related to current year tax positions		3		2		3
Increases related to prior period tax positions		12		9		1
Decreases related to prior period tax positions		—		(13)		—
Settlements		(2)		(3)		(1)
Lapse of statute of limitations		(1)		(2)		(1)
Unrecognized tax benefits at end of year	$	45	$	34	$	44

It is reasonably possible that the liability associated with our unrecognized tax benefits will increase or decrease within the next twelve months. These changes may be the result of foreign currency fluctuations, ongoing audits, or the expiration of statutes of limitations. Settlements during 2020 are not expected to be significant based on current estimates. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although we believe that an adequate provision has been made for such issues, the ultimate resolution could have an adverse effect on the earnings of the Company. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, generating a positive effect on earnings. Due to the uncertainty of amounts and in accordance with our accounting policies, we have not recorded any potential consequences of these settlements. In addition, to the extent there are settlements in the future for certain foreign unrecognized tax benefits, the transition tax may also be revised accordingly.