INCOME TAXES
Earnings (loss) before income taxes are as follows:
|
| | | | | | | | | | | | |
| | Fiscal Years Ended |
(In millions) | | January 28,
2017 | | January 30,
2016 | | January 31,
2015 |
U.S. | | $ | (147 | ) | | $ | (169 | ) | | $ | (263 | ) |
Foreign | | 152 |
| | 121 |
| | 7 |
|
Earnings (loss) before income taxes | | $ | 5 |
| | $ | (48 | ) | | $ | (256 | ) |
Income tax expense (benefit) is as follows:
|
| | | | | | | | | | | | |
| | Fiscal Years Ended |
(In millions) | | January 28,
2017 | | January 30,
2016 | | January 31,
2015 |
Current: | | | | | | |
U.S. Federal | | $ | — |
| | $ | 1 |
| | $ | (13 | ) |
Foreign | | 53 |
| | 54 |
| | 46 |
|
State | | 5 |
| | 4 |
| | — |
|
Total current income tax expense | | $ | 58 |
| | $ | 59 |
| | $ | 33 |
|
Deferred: | | | | | | |
U.S. Federal | | $ | (29 | ) | | $ | — |
| | $ | 1 |
|
Foreign | | 7 |
| | 17 |
| | (2 | ) |
State | | (2 | ) | | — |
| | — |
|
Total deferred income tax (benefit) expense | | $ | (24 | ) | | $ | 17 |
| | $ | (1 | ) |
Total income tax expense | | $ | 34 |
| | $ | 76 |
| | $ | 32 |
|
Included within Income tax expense is an expense of $3 million, expense of $2 million and benefit of less than $1 million related to interest and penalties in fiscals 2016, 2015 and 2014, respectively. The interest and penalties relate to tax payments and refunds for prior period tax filings made or to be made, as well as amounts associated with increases and decreases to unrecognized tax benefits.
We have not provided deferred taxes on $1 million of accumulated earnings of certain foreign subsidiaries as it is management’s intention to reinvest those earnings indefinitely. The estimated unrecognized deferred income tax liabilities on these earnings, net of associated foreign tax credits and other offsets, is zero.
The effective tax rate reconciliations are as follows:
|
| | | | | | | | | |
| | Fiscal Years Ended |
| | January 28,
2017 | | January 30,
2016 | | January 31,
2015 |
U.S. Federal statutory tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
State taxes, net of U.S. Federal benefit | | 29.6 | % | | (5.4 | )% | | — | % |
Foreign operations (1) | | (754.6 | )% | | (183.7 | )% | | (13.5 | )% |
U.S. Federal valuation allowance | | 1,249.5 | % | | (10.4 | )% | | (36.6 | )% |
Unrecognized tax benefits (2) | | — | % | | — | % | | 3.0 | % |
Other | | 120.5 | % | | 6.2 | % | | (0.4 | )% |
Effective tax rate | | 680.0 | % | | (158.3 | )% | | (12.5 | )% |
| |
(1) | Foreign operations benefit in fiscal 2016 primarily related to a benefit from a deemed repatriation of earnings from a high tax international jurisdiction. Foreign operations also include the net impact of: differences between local statutory rates and the U.S. Federal statutory rate; the impact of changes to foreign valuation allowances; the net cost of foreign unrecognized tax benefits; the cost of repatriating foreign earnings, net of foreign tax credits; changes to our assertion regarding the permanent reinvestment of foreign earnings related to certain foreign entities; permanent items related to foreign operations; as well as enacted changes in the tax laws or rates or a change in the status of the enterprise. |
| |
(2) | Unrecognized tax benefits include benefits related to the resolution of issues in connection with resolving tax examinations, making protective elections, as well as changes to and clarifications of tax rules and regulations. Refer to “Unrecognized Tax Benefits” in this footnote. |
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are:
|
| | | | | | | | |
(In millions) | | January 28,
2017 | | January 30,
2016 |
Deferred tax assets: | | | | |
U.S. Federal tax loss and other carryforwards | | $ | 364 |
| | $ | 358 |
|
State tax loss and other carryforwards | | 86 |
| | 83 |
|
Foreign tax loss and other carryforwards | | 144 |
| | 164 |
|
Straight line rent | | 124 |
| | 127 |
|
Inventory | | 76 |
| | 60 |
|
Insurance loss reserve | | 36 |
| | 38 |
|
Restructuring charges | | 2 |
| | 5 |
|
Other | | 139 |
| | 148 |
|
Gross deferred tax assets before valuation allowance | | 971 |
| | 983 |
|
Valuation allowance | | (707 | ) | | (656 | ) |
Total deferred tax assets | | $ | 264 |
| | $ | 327 |
|
Deferred tax liabilities: | | | | |
Fixed assets (1) | | $ | (17 | ) | | $ | (39 | ) |
Undistributed earnings of foreign subsidiaries | | (129 | ) | | (214 | ) |
Foreign currency translation | | (47 | ) | | (28 | ) |
Other | | (17 | ) | | (14 | ) |
Total deferred tax liabilities | | $ | (210 | ) | | $ | (295 | ) |
Net deferred tax assets | | $ | 54 |
| | $ | 32 |
|
| |
(1) | Includes deferred impact of finance obligations associated with capital projects. |
The deferred tax assets and liabilities above are reflected in the Consolidated Balance Sheets as follows:
|
| | | | | | | | |
(In millions) | | January 28,
2017 | | January 30,
2016 |
Deferred tax assets | | $ | 129 |
| | $ | 96 |
|
Deferred tax liabilities | | (75 | ) | | (64 | ) |
| | $ | 54 |
| | $ | 32 |
|
Our gross deferred tax assets above include an offset of $12 million and $8 million of unrecognized tax benefits related to tax loss carryforwards as of January 28, 2017 and January 30, 2016, respectively.
Carryforwards
In addition to the unused portion of losses and credits reported on tax returns, our carryforwards also include interest deductions that are being carried forward due to thin-capitalization and other tax limitations, as well as credits that will be realized in connection with the undistributed earnings of foreign subsidiaries on which we have provided taxes.
Of our $364 million of U.S. Federal tax loss and other carryforwards, $1 million will expire during the next 5 years, $266 million will expire during the next 6 to 20 years and $97 million may be carried forward indefinitely. Of our $86 million of state tax loss and other carryforwards, $13 million will expire during the next 5 years, $61 million will expire during the next 6 to 20 years and $12 million may be carried forward indefinitely. Of our $144 million of foreign tax loss and other carryforwards, $6 million will expire during the next 5 years, $2 million will expire during the next 6 to 20 years and $136 million may be carried forward indefinitely.
On July 21, 2005, the Company was acquired by the Sponsors. U.S. Federal and certain state and foreign taxing jurisdictions impose limitations on the amount of tax losses, credits and other carryforwards that can be used to offset current income and tax within any given year when there has been an ownership change. We have evaluated the impact of these limitations and have established a valuation allowance to reduce some of these deferred tax assets to the amount expected to be realized.
Valuation Allowance
We have evaluated the available positive and negative evidence and have concluded that, for some of our deferred tax assets, it is more likely than not that these assets will not be realized in the foreseeable future. As a result, we have established a valuation allowance to reduce these deferred tax assets for the amount we believe will not be realized. The increase to our valuation allowance for U.S. Federal and state jurisdictions, as well as in certain foreign jurisdictions, was predominantly due to the fact that, as of the end of fiscal 2016, we have incurred a pre-tax cumulative loss over the past three fiscal years. During fiscal 2016, our valuation allowance increased by $51 million. This includes a $65 million increase for U.S. Federal tax, a $1 million increase for state tax and a $15 million decrease for foreign tax.
Of our total valuation allowance of $707 million, there is $6 million related to the foreign valuation allowance which, if a benefit is subsequently recognized, will result in a reduction of another asset.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits (excluding interest and penalties) is as follows:
|
| | | | | | | | | | | | |
| | Fiscal Years Ended |
(In millions) | | January 28,
2017 | | January 30,
2016 | | January 31,
2015 |
Beginning balance | | $ | 32 |
| | $ | 30 |
| | $ | 37 |
|
Additions for tax positions of the current year | | 3 |
| | 2 |
| | 4 |
|
Additions for tax positions of prior years | | 5 |
| | 2 |
| | 5 |
|
Reductions for tax positions of prior years (1) | | (1 | ) | | — |
| | (11 | ) |
Currency translation adjustment | | (1 | ) | | (1 | ) | | (4 | ) |
Lapse of statute of limitations | | (1 | ) | | (1 | ) | | (1 | ) |
Ending balance | | $ | 37 |
| | $ | 32 |
| | $ | 30 |
|
| |
(1) | Reductions for tax positions of prior years include amounts related to the resolution of issues in connection with resolving tax examinations, making protective elections, as well as changes to and clarifications of tax rules and regulations. |
At January 28, 2017, $30 million of the $37 million of unrecognized tax benefits would affect our effective tax rate, if recognized, and the remaining $7 million would affect our deferred tax accounts. In addition, we had $8 million and less than $1 million of accrued interest and penalties, respectively, at January 28, 2017. We had $6 million and less than $1 million of accrued interest and penalties, respectively, at January 30, 2016, and $4 million and less than $1 million of accrued interest and penalties, respectively, at January 31, 2015.
The Company and its subsidiaries are subject to taxation in the United States and various foreign jurisdictions. Of the major jurisdictions, we are subject to examination in: the United States for U.S. Federal purposes for fiscal 2015 and forward and for state purposes for fiscal 2008 and forward; Australia for fiscal 2009 and forward; Canada for fiscal 2008 and forward; France for fiscal 2012 and forward; Germany for fiscal 2009 and forward; Japan for fiscal 2008 and forward; Spain for fiscal 2008 and forward; and the UK for fiscal 2009 and forward. While it is often difficult to predict whether we will prevail, we believe that our tax liabilities for unrecognized tax benefits reflect the more likely than not outcome of known tax contingencies.
We believe that it is reasonably possible that the total amount of unrecognized tax benefits of $45 million (inclusive of tax, interest and penalties) will not change during the next twelve months due to ongoing tax examinations and applicable statutes of limitations.