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Income Taxes
 12 Months Ended
Jan. 29, 2022
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
Intra-Entity Transaction
During the third quarter of fiscal 2022, the Company completed an intra-entity transfer of intellectual property rights from a U.S. entity to a wholly-owned Swiss subsidiary, more closely aligning the Company’s intellectual property rights with its business operations. This transaction resulted in a taxable gain in the U.S. The U.S. taxable gain generated by this intercompany transfer of intellectual property was primarily offset by the recognition of a deferred income tax asset in the Swiss subsidiary.
The intra-entity transfer of intellectual property rights resulted in a U.S. income tax expense of approximately $106 million. The U.S. income tax expense generated by this intercompany transfer of intellectual property was substantially offset by the recognition of a deferred income tax asset in the Swiss subsidiary of approximately $102 million. The net impact to the Company’s income tax expense for this transaction was approximately $4 million.
For the intra-entity transfer of the intellectual property rights, the Company made U.S. income tax payments of $107.2 million. The Company estimates it will take between 5 and 10 years to amortize the Swiss deferred income tax asset.
Changes in Income Tax Law
On March 27, 2020, the U.S. government enacted the CARES Act to provide economic relief from the COVID-19 pandemic. Among other provisions, the CARES Act allows for a full offset of taxable income in a five-year carryback period for net operating losses, which will reduce current period income tax expense and may result in a refund of previously paid income tax amounts at higher historical income tax rates. For the year ended January 30, 2021, the Company recognized an income tax benefit of $0.9 million related to the CARES Act.
During calendar 2019, Switzerland implemented income tax reform (“Swiss tax reform”) that was effective as of January 1, 2020. The Swiss tax reform eliminates certain preferential income tax treatments and includes transitional relief measures which provides for future income tax deductions. During the fourth quarter of fiscal 2020, the Company recognized a one-time income tax benefit of approximately $8.1 million related primarily to
the recognition of a deferred income tax asset associated with the estimated value of an income tax basis step-up of the Company’s Switzerland subsidiary’s assets.
The Company has historically considered the undistributed earnings of its foreign subsidiaries to be indefinitely reinvested. As a result of the Tax Reform, the Company had a substantial amount of previously taxed earnings that could be distributed to the U.S. without additional U.S. taxation. The Company continues to evaluate its plans for reinvestment or repatriation of unremitted foreign earnings and regularly reviews its cash positions and determination of permanent reinvestment of foreign earnings. As of January 29, 2022, the Company determined approximately $7.4 million of such foreign earnings are no longer indefinitely reinvested. The incremental income tax cost to repatriate these earnings to the U.S. is immaterial. The Company intends to indefinitely reinvest the remaining earnings from the Company’s foreign subsidiaries for which a deferred income tax liability has not already been recorded. It is not practicable to estimate the amount of income tax that might be payable if these earnings were repatriated due to the complexities associated with the hypothetical calculation.
Income Tax Settlement
In connection with an income tax audit in Italy, the Italian tax authority indicated it believed certain dividend distributions made in fiscal years 2015 and 2016 from the Company’s Italian subsidiaries to their European parent holding company should be subject to certain withholding taxes in Italy. While the Company disagreed with the position of the Italian tax authority and was prepared to vigorously defend itself in this matter, the Company continued to work with the Italian tax authority in an attempt to resolve the dispute through standard tax resolution processes. In December 2019, to avoid a potentially long and costly litigation process, the Company reached an agreement with the Italian tax authority to settle the matter for €9.9 million ($11.1 million) (including interest), to be paid in 16 equal quarterly installments starting in December 2019. As a result of the agreement, the Company recorded a charge to income tax expense of €7.0 million ($7.8 million) (net of related offsets in other income tax jurisdictions) during the fourth quarter of fiscal 2020. As of January 29, 2022, the Company had recorded €2.5 million ($2.8 million) and €2.5 million ($2.8 million) in accrued expenses and other long-term liabilities, respectively, in the accompanying balance sheets. As of January 30, 2021, the Company had recorded €2.4 million ($3.2 million) and €5.0 million ($6.1 million) in accrued expenses and other long-term liabilities, respectively, in the accompanying consolidated balance sheets.
Income Tax Expense
Income tax expense (benefit) is summarized as follows (in thousands):
Year Ended
Jan 29, 2022Jan 30, 2021Feb 1, 2020
Federal:   
Current$149,811 $(2,390)$9,270 
Deferred9,859 (5,274)2,263 
State:   
Current10,433 248 1,622 
Deferred2,443 (598)1,699 
Foreign:   
Current13,592 8,285 17,166 
Deferred(112,458)(6,609)(9,507)
Total$73,680 $(6,338)$22,513 
Actual income tax expense (benefit) differs from expected income tax expense (benefit) obtained by applying the statutory federal income tax rate to earnings before income taxes as follows:
Year Ended
Jan 29, 2022Jan 30, 2021Feb 1, 2020
Computed “expected” tax rate21.0 %21.0 %21.0 %
State taxes, net of federal benefit1.6 %1.2 %3.0 %
Non-U.S. tax expense higher than federal statutory tax rate1
(2.4 %)9.1 %0.0 %
Tax Reform - repatriation tax adjustment0.2 %— %— %
SERP/TOLI(0.1 %)1.9 %(1.5 %)
Non-deductible participation loss1.8 %3.6 %— %
Swiss tax reform2
— %— %(6.5 %)
Valuation reserve3
0.7 %(26.9 %)(0.2 %)
Intra-entity intellectual property transfer tax rate difference4
1.6 %— %— %
Unrecognized tax liabilities (benefits)(0.6 %)(6.6 %)(6.2 %)
Share-based compensation(0.4 %)1.8 %0.9 %
Net tax settlements— %— %9.1 %
Prior year tax adjustments0.4 %1.3 %(1.8 %)
Non-deductible permanent differences0.6 %0.4 %2.1 %
Foreign derived intangible income5
(1.5 %)— %(3.4 %)
Subpart F Income4.5 %— %— %
GILTI0.6 %— %— %
Other1.0 %0.5 %1.7 %
Effective income tax rate29.0 %7.3 %18.2 %
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1The jurisdictional location of pre-tax income (loss) may represent a significant component of the Company’s effective income tax rate as earnings (loss) in foreign jurisdictions are taxed at rates that are different from the U.S. statutory income tax rate. These amounts exclude the impact of net changes in valuation allowances, audit and other adjustments related to the Company’s non-U.S. operations, as they are reported separately in the appropriate corresponding line items above.
2During fiscal 2020, the Company recognized additional income tax benefits resulting from the enactment of the Swiss tax reform. The additional income tax benefits related primarily to the recognition of a deferred income tax asset associated with the estimated value of an income tax basis step-up of the Company’s Switzerland subsidiary’s assets.
3Amounts relate primarily to valuation reserves on net operating losses, other deferred income tax assets arising during the respective period and valuation reserves resulting from jurisdictions where there have been cumulative net operating losses, limiting the Company’s ability to consider other subjective evidence to continue to recognize the existing deferred income tax assets.
4During fiscal 2022, the Company completed an intra-entity transfer of intellectual property rights from a U.S. entity to a wholly-owned Swiss subsidiary, resulting in income tax rate difference of $4.0 million.
5During fiscal 2022, the Company recognized an additional foreign derived intangible income tax benefits of $37.0 million related to the intra-entity transfer of intellectual property rights.
Total income tax expense (benefit) is allocated as follows (in thousands):
Year Ended
Jan 29, 2022Jan 30, 2021
Feb 1, 20201
Operations$73,680 $(6,338)$22,513 
Stockholders’ equity2,264 (1,534)(1,142)
Total income tax expense (benefit)$75,944 $(7,872)$21,371 
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1In April 2019, the Company issued the Notes in a private offering. Paid-in capital includes $1.3 million in net deferred income tax assets in connection with the related convertible note hedge transactions and debt discount associated with the Notes. Refer to Notes 2 and 10 for more information on the convertible senior notes and related transactions.
The income tax effects of the components of other comprehensive income (loss) are allocated as follows (in thousands):
Year Ended
Jan 29, 2022Jan 30, 2021Feb 1, 2020
Derivative financial instruments designated as cash flow hedges$1,627 $(1,387)$80 
Defined benefit plans637 (147)68 
Total income tax expense (benefit)$2,264 $(1,534)$148 
Total earnings (loss) before income tax expense (benefit) and noncontrolling interests are comprised as follows (in thousands):
Year Ended
Jan 29, 2022Jan 30, 2021Feb 1, 2020
Domestic operations$141,920 $(27,984)$91,008 
Foreign operations111,809 (59,095)32,734 
Earnings (loss) before income tax expense (benefit) and noncontrolling interests$253,729 $(87,079)$123,742 
Deferred Income Taxes
The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities are as follows (in thousands):
Jan 29, 2022Jan 30, 2021
Deferred income tax assets:  
Operating lease liabilities$169,771 $193,789 
Intangible assets109,887 — 
Net operating losses38,583 38,117 
Defined benefit plans11,762 12,596 
Deferred compensation7,632 7,877 
Convertible senior notes hedge transactions6,884 9,697 
Deferred income5,771 6,258 
Goodwill amortization4,657 6,542 
Sales return and other reserves2,710 1,988 
Accrued bonus2,575 984 
Lease incentives1,918 2,187 
Excess of book over tax depreciation/amortization1,784 6,183 
Account receivable reserve1,780 2,520 
Inventory valuation1,679 4,788 
Uniform capitalization1,004 756 
Other13,826 13,538 
Total deferred income tax assets382,223 307,820 
Deferred income tax liabilities:  
Operating right-of-use assets(155,618)(172,496)
Convertible senior notes debt discount(6,207)(8,776)
Valuation allowance(55,278)(54,131)
Net deferred income tax assets$165,120 $72,417 
Based on the historical earnings of the Company and projections of future taxable earnings in certain jurisdictions, management believes it is more likely than not that the results of operations will not generate sufficient taxable earnings to realize certain net deferred income tax assets. Therefore, the Company has recorded a valuation allowance of $55.3 million, which is an increase of $1.1 million from the prior year.
As of January 29, 2022, certain of the Company’s operations had net operating loss carryforwards of $45.8 million (income tax effected, not net of uncertain income tax positions), including state/provincial net operating loss carryforwards. These are comprised of $9.9 million (income tax effected, not net of uncertain income tax positions) of net operating loss carryforwards with an unlimited carryforward life, $35.7 million (income tax effected, not net of uncertain income tax positions) of foreign net operating loss carryforwards expiring between fiscal 2023 and fiscal 2041 and $0.3 million (income tax effected) of state/provincial net operating loss carryforwards expiring starting fiscal 2023 and beyond. Based on the historical earnings of these operations, management believes it is more likely than not that some of the operations will not generate sufficient earnings to utilize these net operating losses. As of January 29, 2022 and January 30, 2021, the Company had a valuation allowance of $39.8 million and $35.8 million, respectively, related to its net operating loss carryforwards.
Unrecognized Income Tax Benefit
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 and other tax audits on various tax matters around the world in the ordinary course of business.
A reconciliation of the beginning and ending amount of gross unrecognized income tax benefit (excluding interest and penalties) is as follows (in thousands):
Year Ended
Jan 29, 2022Jan 30, 2021Feb 1, 2020
Beginning balance$34,246 $29,183 $38,751 
Additions:
Tax positions related to the prior year280 110 3,074 
Tax positions related to the current year21,616 8,204 264 
Reductions:
Tax positions related to the prior year(2,405)(3,251)(12,658)
Tax positions related to the current year(2,001)— — 
Foreign currency translation— — (248)
Ending balance$51,736 $34,246 $29,183 
The amount of unrecognized income tax benefit as of January 29, 2022 and January 30, 2021 includes $33.1 million and $33.7 million (net of federal benefit on state issues), respectively, which, if ultimately recognized, may reduce our future annual effective income tax rate.
From time-to-time, the Company is subject to routine income and other income tax audits on various income tax matters around the world in the ordinary course of business. As of January 29, 2022, no major income tax audits were ongoing.
As of January 29, 2022 and January 30, 2021, the Company had $57.5 million and $40.0 million, respectively, of aggregate accruals for uncertain income tax positions, including penalties and interest. This includes an accrual of $19.9 million for the estimated transition tax (excluding interest related to the Tax Reform) and $20.6 million for the intra-entity transfer of intellectual property rights, substantially offset by the related deferred income tax benefit, from a U.S. entity to a wholly-owned Swiss Subsidiary. The Company reviews and updates the estimates used in the accrual for uncertain income tax positions, as appropriate, as more definitive information or interpretations become available from income taxing authorities, and on the completion of income tax audits, the receipt of assessments, expiration of statutes of limitations, or occurrence of other events.
The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company included interest and penalties related to uncertain income tax positions of a $0.2 million, $0.9 million and $2.2 million in income tax expense for fiscal years 2022, 2021 and 2020, respectively. Total interest and penalties related to uncertain income tax positions was $5.7 million and $5.7 million at January 29, 2022 and January 30, 2021, respectively.
During the second quarter of fiscal 2021, the Company became aware of a foreign withholding income tax regulation that could be interpreted to apply to certain of its previous transactions. The Company currently does not expect its exposure, if any, will have a material impact on its consolidated financial position, results of operations or cash flows.