Entity information:
Income Taxes
For financial reporting purposes, components of income before income taxes are as follows:
 
 
Fiscal Year
($ in millions)
 
2017
 
2016
 
2015
United States
 
$
1,301

 
$
1,191

 
$
1,401

Foreign
 
123

 
(67
)
 
70

Income before income taxes
 
$
1,424

 
$
1,124

 
$
1,471


The provision for income taxes consists of the following:
 
 
Fiscal Year
($ in millions)
 
2017
 
2016
 
2015
Current:
 
 
 
 
 
 
Federal
 
$
415

 
$
405

 
$
418

State
 
51

 
47

 
25

Foreign
 
49

 
50

 
7

Total current
 
515

 
502

 
450

Deferred:
 
 
 
 
 
 
Federal
 
55

 
(41
)
 
99

State
 
(5
)
 
(5
)
 
12

Foreign
 
11

 
(8
)
 
(10
)
Total deferred
 
61

 
(54
)
 
101

Total provision
 
$
576

 
$
448

 
$
551


The difference between the effective tax rate and the U.S. federal statutory tax rate is as follows:
 
 
Fiscal Year
 
 
2017
 
2016
 
2015
Federal statutory tax rate
 
33.7
 %
 
35.0
 %
 
35.0
 %
State and local income taxes, net of federal benefit
 
4.0

 
3.7

 
2.5

Tax impact of foreign operations
 
(1.1
)
 
4.5

 
0.3

Impact of Tax Cuts and Jobs Act of 2017
 
4.0

 
—

 
—

Excess foreign tax credits
 
(0.7
)
 
(5.0
)
 
—

Non-deductible goodwill impairment charge
 
—

 
2.2

 
—

Other
 
0.5

 
(0.5
)
 
(0.3
)
Effective tax rate
 
40.4
 %
 
39.9
 %
 
37.5
 %

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “TCJA”) was enacted into law, which significantly changes existing U.S. tax law and includes numerous provisions that affect our business, such as imposing a one-time transition tax on deemed repatriation of deferred foreign income, reducing the U.S. federal statutory tax rate, and adopting a territorial tax system. The TCJA resulted in a one-time transition tax, payable over eight years without interest or penalties, on deferred foreign income not previously subject to U.S. income tax at a rate of 15.5% for income held in foreign cash and certain other net current assets, and 8% on the remaining income. The TCJA also reduces the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018, which resulted in a remeasurement of deferred tax assets and liabilities. The TCJA includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries and a base erosion anti-abuse tax (“BEAT”) measure that taxes certain payments between a U.S. corporation and its subsidiaries. The GILTI and BEAT provisions of the TCJA will be effective for us beginning fiscal 2018.
On December 22 2017, the Securities and Exchange Commission (“SEC”) issued SEC Staff Accounting Bulletin (“SAB”) No. 118 to address the application of FASB Accounting Standards Codification ("ASC") Topic 740, Income Taxes, in reporting periods that include December 22, 2017. SAB No. 118 permits organizations to report provisional amounts during a measurement period for the specific income tax effects of the TCJA for which the accounting under ASC Topic 740 will be incomplete but a reasonable estimate can be determined. The measurement period ends when an organization has obtained, prepared and analyzed the information needed to complete the accounting requirements under ASC Topic 740, not to extend beyond one year from the enactment date of the TCJA.
As of February 3, 2018, we have not finalized our accounting for the tax effects of the TCJA. We have made a reasonable estimate of the effects of TCJA and recorded an estimated net charge of $57 million, primarily due to the impact of the one-time transition tax on the deemed repatriation of foreign income and the impact of TCJA on remeasurement of deferred tax assets and liabilities. The provisional net charge is subject to revisions as we complete our analysis of the TCJA, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service (“IRS”), FASB, and other standard-setting and regulatory bodies. Adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. Our accounting for the tax effects of the TCJA will be completed during the measurement period, which will not extend beyond one year from the enactment date.
We recorded an estimated $59 million charge related to the transition tax, which was included in income taxes on our Consolidated Income Statement and lease incentives and other long term liabilities on our Consolidated Balance Sheet. We have not finalized our accounting for the transition tax as our analysis of our total post-1986 earnings and profits (E&P) which we have previously deferred from U.S. income taxes is not complete. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation, determine the impact on the transition tax of other fiscal year 2017 transactions and finalize the amounts held in cash or other specified assets. Our estimate of the transition tax is also impacted by a change in the structure of certain legal entities in fiscal 2017, which resulted in an overall net tax benefit of approximately $23 million.
We recorded a provisional estimated benefit of $2 million related to the impact of TCJA on our recorded deferred tax assets and liabilities, which was included in income taxes on our Consolidated Income Statement and other long-term assets on our Consolidated Balance Sheet. We remeasured our deferred taxes to reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods and reversed certain deferred tax balances recorded for previously unremitted earnings. We have not yet completed our accounting for changes to deferred taxes, including those balances associated with fixed assets and executive compensation, and have recorded provisional estimates in our financial statements that will be subject to further revisions as a result of TCJA.
Due to the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the TCJA. Under GAAP, we can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense, or factor such amounts into our measurement of deferred taxes. We will make such accounting policy election during the measurement period.
For fiscal 2016, the tax impact of foreign operations includes the effects of restructuring costs incurred in certain foreign subsidiaries for which the Company was not able to recognize any tax benefit. In connection with a review of the Company’s legal entity structure, we realigned certain entities in fiscal 2016, which resulted in an overall net tax benefit of approximately $57 million. This benefit is primarily due to the recognition of foreign tax credits which exceeded the taxes due upon the realignment.
The impact of state and local income taxes for fiscal 2015, net of federal benefit, includes retroactive tax benefits resulting from the approval of certain state tax credits which the company received in fiscal 2015.
Deferred tax assets (liabilities) consist of the following:
($ in millions)
 
February 3,
2018
 
January 28,
2017
Gross deferred tax assets:
 
 
 
 
Deferred rent
 
$
125

 
$
164

Accrued payroll and related benefits
 
55

 
98

Accruals
 
100

 
112

Inventory capitalization and other adjustments
 
23

 
55

Deferred income
 
32

 
57

Unrealized net loss on cash flow hedges
 
4

 
—

Federal, state, and foreign net operating losses
 
64

 
65

Other
 
36

 
48

Total gross deferred tax assets
 
439

 
599

Valuation allowance
 
(151
)
 
(133
)
Total deferred tax assets, net of valuation allowance
 
288

 
466

Deferred tax liabilities:
 
 
 
 
Depreciation and amortization
 
(79
)
 
(140
)
Unremitted earnings of certain foreign subsidiaries
 
(4
)
 
(58
)
Unrealized net gain on cash flow hedges
 
—

 
(11
)
Other
 
(8
)
 
(8
)
Total deferred tax liabilities
 
(91
)
 
(217
)
Net deferred tax assets
 
$
197

 
$
249


As of February 3, 2018, we had approximately $28 million of state and $277 million of foreign loss carryovers in multiple taxing jurisdictions that could be utilized to reduce the tax liabilities of future years. The tax-effected loss carryovers were approximately $2 million for state and $61 million for foreign as of February 3, 2018. We provided a valuation allowance of approximately $50 million against the deferred tax assets related to the foreign loss carryovers. We also provided a valuation allowance of approximately $101 million related to other foreign deferred tax assets. The state losses expire between fiscal 2021 and fiscal 2036, approximately $73 million of the foreign losses expire between fiscal 2018 and fiscal 2037, and $204 million of the foreign losses do not expire.
The activity related to our unrecognized tax benefits is as follows: 
 
 
Fiscal Year
($ in millions)
 
2017
 
2016
 
2015
Balance at beginning of fiscal year
 
$
44

 
$
47

 
$
75

Increases related to current year tax positions
 
48

 
4

 
3

Prior year tax positions:
 
 
 
 
 
 
Increases
 
28

 
3

 
6

Decreases
 
(2
)
 
(5
)
 
(34
)
Lapse of Statute of Limitations
 
(1
)
 
—

 
—

Cash settlements
 
—

 
(5
)
 
(3
)
Foreign currency translation
 
1

 
—

 
—

Balance at end of fiscal year
 
$
118

 
$
44

 
$
47


Of the $118 million, $44 million, and $47 million of total unrecognized tax benefits as of February 3, 2018, January 28, 2017, and January 30, 2016, respectively, approximately $106 million, $34 million, and $34 million, respectively, represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods.
During fiscal 2017 and 2015, interest expense of $4 million and $1 million, respectively, was recognized in the Consolidated Statements of Income relating to tax liabilities. During fiscal 2016, there were no material amounts for interest expense relating to tax liabilities. In fiscal 2015, we also recognized an interest expense reversal of $15 million in the Consolidated Statement of Income, primarily as a result of a favorable foreign tax ruling and actions of foreign tax authorities related to transfer pricing matters. We reduced our unrecognized tax benefits for these matters by $32 million, and there was no impact on the tax provision due to the offsetting decrease for the U.S. indirect effect of these unrecognized tax benefits.
As of February 3, 2018 and January 28, 2017, the Company had total accrued interest related to the unrecognized tax benefits of $7 million and $3 million, respectively. There were no accrued penalties related to the unrecognized tax benefits as of February 3, 2018 or January 28, 2017.
The Company conducts business globally, and as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, Canada, France, the United Kingdom, China, Hong Kong, Japan, and India. We are no longer subject to U.S. federal income tax examinations for fiscal years before 2009, and with few exceptions, we also are no longer subject to U.S. state, local, or non-U.S. income tax examinations for fiscal years before 2008.
The Company engages in continual discussions with taxing authorities regarding tax matters in the various U.S. and foreign jurisdictions in the normal course of business. As of February 3, 2018, it is reasonably possible that we will recognize a decrease in gross unrecognized tax benefits within the next 12 months of up to $7 million, primarily due to the closing of audits. If we do recognize such a decrease, the net impact on the Consolidated Statement of Income would not be material.