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Income Taxes

12 Months Ended

Jan. 30, 2021

16. Income Taxes

The domestic and international components of pre-tax income are as follows:


($ in millions)	2020		2019		2018
Domestic	$	647	$	591	$	629
International		(153)		81		84
Total pre-tax income	$	494	$	672	$	713

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.

The income tax provision consists of the following:


($ in millions)	2020		2019		2018
Current:
Federal	$	114	$	106	$	91
State and local		43		39		42
International		23		31		30
Total current tax provision		180		176		163
Deferred:
Federal		6		(1)		(4)
State and local		(2)		—		1
International		(13)		6		12
Total deferred tax (benefit) provision		(9)		5		9
Total income tax provision	$	171	$	181	$	172

Following the enactment of Public Law 115-97 (“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 January 30, 2021, we had accumulated undistributed foreign earnings of approximately $631 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:


	2020		2019		2018
Federal statutory income tax rate	21.0	%	21.0	%	21.0	%
Deemed repatriation tax	—		—		(2.7)
Increase in valuation allowance	6.3		1.0		2.4
State and local income taxes, net of federal tax benefit	6.6		4.5		4.7
International income taxed at varying rates	4.3		1.9		1.6
Foreign tax credits	(2.4)		(2.0)		(2.1)
Domestic/foreign tax settlements	(0.5)		—		(0.7)
Federal tax credits	(0.4)		(0.2)		(0.2)
Other, net	(0.4)		0.8		0.1
Effective income tax rate	34.5	%	27.0	%	24.1	%

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:

($ in millions)	2020		2019
Deferred tax assets:
Tax loss/credit carryforwards and capital loss	$	120	$	54
Employee benefits		52		40
Property and equipment		13		30
Goodwill and other intangible assets		—		14
Operating leases - liabilities		811		844
Other		39		29
Total deferred tax assets	$	1,035	$	1,011
Valuation allowance		(76)		(39)
Total deferred tax assets, net	$	959	$	972
Deferred tax liabilities:
Merchandise inventories	$	62	$	86
Operating leases - assets		746		794
Goodwill and other intangible assets		13		—
Net investment gains		46		—
Other		9		13
Total deferred tax liabilities	$	876	$	893
Net deferred tax asset	$	83	$	79
Balance Sheet caption reported in:
Deferred taxes	$	101	$	81
Other liabilities		(18)		(2)
	$	83	$	79

Based upon the level of historical taxable income and projections for future taxable income, which are based upon our long-range strategic plans, management believes it is more likely than not that we will realize the benefits of deductible differences, net of the valuation allowances at January 30, 2021, 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 January 30, 2021, we have a valuation allowance of $76 million to reduce our deferred tax assets to an amount that is more likely than not to be realized. A valuation allowance of $67 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 January 30, 2021, a valuation allowance of $8 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 since 2019 for a deferred tax asset arising from a capital loss associated with an uncollectible Canadian note receivable.

At January 30, 2021, 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 $103 million, a portion of which will expire between 2021 and 2027 and a portion of which will never expire. We will have, when realized, a capital loss with a potential benefit of $1 million arising from a Canadian note receivable. The Canadian loss will carryforward indefinitely after realization. The international operating loss carryforwards do not include unrecognized tax benefits. We also have foreign tax credit carrybacks and carryforwards with a potential tax benefit of $12 million that will expire between 2021 and 2030.

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 that we have adopted in our income tax filings. Accordingly, we may apply different tax treatments for transactions in filing its 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 2019 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 2021. We are participating in the IRS’s Compliance Assurance Process (“CAP”) for 2021 and 2020. The 2020 CAP is expected to conclude during 2021. We are subject to state and local tax examinations from 2017 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 January 30, 2021, we had $47 million of gross unrecognized tax benefits, of which $35 million would, if recognized, affect our annual effective tax rate. We classified certain income tax liabilities as current or noncurrent based on management’s estimate of when these liabilities will be settled. Interest expense and penalties related to unrecognized tax benefits are classified as income tax expense. We recognized $1 million of interest expense in both 2020 and 2019. Interest was not significant for 2018. The total amount of accrued interest and penalties was $3 million, $2 million, and $1 million in 2020, 2019, and 2018, respectively.

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


($ in millions)	2020		2019		2018
Unrecognized tax benefits at beginning of year	$	45	$	34	$	44
Foreign currency translation adjustments		3		(1)		(3)
Increases related to current year tax positions		2		3		2
Increases related to prior period tax positions		3		12		9
Decreases related to prior period tax positions		—		—		(13)
Settlements		(1)		(2)		(3)
Lapse of statute of limitations		(5)		(1)		(2)
Unrecognized tax benefits at end of year	$	47	$	45	$	34

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 2021 are not expected to be significant based on current estimates. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although management believes that adequate provision has been made for such issues, the ultimate resolution could have an adverse effect on our earnings. 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.