Income Taxes

Income tax expense (benefit) is summarized as follows (in thousands):



	Year Ended			Year Ended		Year Ended
	Feb 1, 2014			Feb 2, 2013		Jan 28, 2012
Federal:
Current	$	61,239		$	42,365	$	84,994
Deferred	(20,294		)	10,943		(3,136		)
State:
Current	6,202			5,853		11,607
Deferred	(1,627		)	1,494		(193		)
Foreign:
Current	25,611			30,775		32,975
Deferred	4,117			7,698		2,444
Total	$	75,248		$	99,128	$	128,691

Except where required by U.S. tax law, no provision was made for U.S. income taxes on the undistributed earnings of the foreign subsidiaries as the Company intends to utilize those earnings in the foreign operations for an indefinite period of time or repatriate such earnings only when tax-effective to do so. That portion of accumulated undistributed earnings of foreign subsidiaries as of February 1, 2014 and February 2, 2013 was approximately $747 million and $689 million, respectively.

Actual income tax expense differs from expected income tax expense obtained by applying the statutory federal income tax rate to earnings before income taxes as follows (in thousands):



	Year Ended			Year Ended			Year Ended
	Feb 1, 2014			Feb 2, 2013			Jan 28, 2012
Computed “expected” tax expense	$	81,536		$	98,215		$	139,769
State taxes, net of federal benefit	2,974			4,776			7,419
Incremental foreign taxes less than federal statutory tax rate	(10,107		)	(13,307		)	(19,457		)
Net tax settlements	—			12,832			—
Unrecognized tax benefit	6,856			147			147
Prior year tax adjustments	(3,489		)	(2,300		)	(1,152		)
Other	(2,522		)	(1,235		)	1,965
Total	$	75,248		$	99,128		$	128,691

Total income tax expense (benefit) was allocated as follows (in thousands):



	Year Ended		Year Ended		Year Ended
	Feb 1, 2014		Feb 2, 2013		Jan 28, 2012
Operations	$	75,248	$	99,128	$	128,691
Stockholders’ equity	3,673		3,703		(208		)
Total income taxes	$	78,921	$	102,831	$	128,483

The tax effects of the components of other comprehensive income were allocated as follows (in thousands):



	Year Ended			Year Ended			Year Ended
	Feb 1, 2014			Feb 2, 2013			Jan 28, 2012
Derivative financial instruments designated as cash flow hedges	$	237		$	(1,056	)	$	1,170
Marketable securities	(4		)	85			(24		)
SERP	2,963			2,855			(2,057		)
Total income tax expense (benefit)	$	3,196		$	1,884		$	(911	)

Total earnings before income tax expense and noncontrolling interests were comprised of the following (in thousands):



	Year Ended		Year Ended		Year Ended
	Feb 1, 2014		Feb 2, 2013		Jan 28, 2012
Domestic operations	$	140,153	$	169,755	$	245,554
Foreign operations	92,806		110,859		153,787
Earnings before income tax expense and noncontrolling interests	$	232,959	$	280,614	$	399,341

The tax effects of temporary differences that give rise to significant portions of current and non-current deferred tax assets and deferred tax liabilities at February 1, 2014 and February 2, 2013 are presented below (in thousands):



	Feb 1, 2014			Feb 2, 2013
Deferred tax assets:
SERP	$	21,716		$	22,719
Rent expense	14,986			14,680
Fixed assets bases difference	12,358			5,695
Deferred income	11,261			1,642
Deferred compensation	10,692			8,483
Bad debt reserve	9,526			7,006
Accrued bonus	2,954			—
Uniform capitalization	2,162			2,096
Net operating losses	2,133			2,413
Other	13,111			17,014
Total deferred assets	100,899			81,748
Deferred tax liabilities:
Lease incentives	(13,488		)	(10,819		)
Goodwill amortization	(3,693		)	(3,189		)
Other	(492		)	(278		)
Valuation allowance	(3,853		)	(3,346		)
Net deferred tax assets	$	79,373		$	64,116

Included above at February 1, 2014 and February 2, 2013, were $24.4 million and $21.1 million for current deferred tax assets, respectively, and $55.0 million and $43.1 million for non-current deferred tax assets, respectively. Based on the historical earnings of the Company and projections of future taxable income, management believes it is more likely than not that the results of operations will not generate sufficient taxable earnings to realize net deferred tax assets. Therefore, the Company has recorded a valuation allowance of $3.9 million, which is an increase of $0.5 million from the prior year.

At February 1, 2014, the Company’s U.S. and certain European retail operations had net operating loss carryforwards of $4.0 million and capital loss carryforwards of $0.2 million. These are comprised of $1.7 million of foreign operating loss carryforwards that expire between fiscal 2015 and fiscal 2023, $2.3 million of state operating loss carryforwards that expire between fiscal 2015 and fiscal 2018 and $0.2 million of U.S. capital loss carryforwards that expire in 2020. Based on the historical earnings of these operations, management believes that it is more likely than not that some of the operations will not generate sufficient income or capital gains to utilize all of the net operating loss and the capital loss. As of February 1, 2014 and February 2, 2013, the Company had a valuation allowance of $0.7 million and $0.9 million, respectively, related to its net operating loss carryforwards.

The Company accrues an amount for its estimate of additional income tax liability which the Company, more likely than not, could incur as a result of the ultimate resolution of income tax audits (“uncertain tax positions”). The Company reviews and updates the estimates used in the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, upon completion of tax audits, upon expiration of statutes of limitation, or upon occurrence of other events.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefit (excluding interest and penalties) is as follows (in thousands):



	Year Ended			Year Ended			Year Ended
	Feb 1, 2014			Feb 2, 2013			Jan 28, 2012
Beginning Balance	$	4,527		$	16,045		$	10,828
Additions:
Tax positions related to the prior year	—			—			4,782
Tax positions related to the current year	7,501			—			78
Reductions:
Tax positions related to the prior year	(1,128		)	(568		)	357
Settlements	—			(10,950		)	—
Expiration of statutes of limitation	—			—			—
Ending Balance	$	10,900		$	4,527		$	16,045

The amount of unrecognized tax benefit at February 1, 2014 includes $9.6 million (net of federal benefit on state issues) which, if ultimately recognized, may reduce our future annual effective tax rate. As of February 1, 2014 and February 2, 2013, the Company had $11.4 million and $5.0 million, respectively, of aggregate accruals for uncertain tax positions, including penalties and interest.

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. There were minimal interest and penalties related to uncertain tax positions included in net income tax expense for fiscal 2014. The Company included benefits from interest and penalties related to uncertain tax positions of $0.9 million and $5.8 million in net income tax expense for fiscal 2013 and fiscal 2012, respectively. Total interest and penalties related to uncertain tax positions was $0.5 million for each of the years ended February 1, 2014 and February 2, 2013.

The Company and its subsidiaries are subject to U.S. federal and foreign income tax as well as income tax of multiple state and foreign local jurisdictions. From time-to-time, the Company is subject to routine income tax audits on various tax matters around the world in the ordinary course of business. Although the Company has substantially concluded all U.S. federal, foreign, state and foreign local income tax matters for years through fiscal 2009, as of February 1, 2014, several income tax audits were underway in multiple jurisdictions for various periods after fiscal 2009. The Company does not believe that the resolution of open matters will have a material effect on the Company’s financial position or liquidity.

Italian Tax Settlement

In January 2013, to avoid a potentially long and costly litigation process, the Company reached an agreement with the Italian tax authority regarding an ongoing audit of one of the Company’s Italian subsidiaries. The agreement covered fiscal years 2008 through 2013 (with fiscal year 2013 remaining subject to final documentation). As a result of the agreement during the fourth quarter of fiscal 2013, the Company recorded a settlement charge of $12.8 million (including penalty and interest and net of related offsets in other tax jurisdictions) in excess of prior uncertain tax position reserves of $11.7 million. As part of the agreement, a portion of the amount payable to the Italian tax authority will be payable in three installments during fiscal 2015. At February 1, 2014, there were no amounts included in other long-term liabilities in the Company’s consolidated balance sheet related to this agreement. At February 2, 2013, the Company included €9.1 million (US$12.4 million) in other long-term liabilities related to this agreement.

The Company was advised by its Italian counsel that tax audits like this one in Italy involving proposed income adjustments greater than €2 million are automatically referred for review by a public prosecutor who may seek to pursue charges or close the matter, and that resulting criminal charges, if any, would be instituted against individuals rather than against the affected companies under Italian law. Consistent with this process, a review proceeding by a prosecutor in Italy was initiated with respect to one current and two former members of the Guess European management team and the Company’s former President (as the signing officer for certain Italian tax returns covering the relevant periods). In July 2013, the matter was closed based on the prosecutor’s recommendation.