TJX COMPANIES INC /DE/

Note L. Income Taxes

For financial reporting purposes, components of income before income taxes are as follows:


	Fiscal Year Ended
In thousands	January 28, 2017		January 30, 2016		January 31, 2015
United States	$	3,196,370	$	3,102,304	$	2,943,745
Foreign		526,673		555,996		606,139
Income before provision for income taxes	$	3,723,043	$	3,658,300	$	3,549,884

The provision for income taxes includes the following:


	Fiscal Year Ended
In thousands	January 28, 2017			January 30, 2016			January 31, 2015
Current:
Federal	$	1,068,778		$	992,094		$	896,672
State		213,505			208,357			180,616
Foreign		148,367			149,408			155,398
Deferred:
Federal		(3,107	)		34,620			87,057
State		(10,583	)		(9,979	)		14,231
Foreign		7,849			6,142			782
Provision for income taxes	$	1,424,809		$	1,380,642		$	1,334,756

TJX had net deferred tax (liabilities) assets as follows:


	Fiscal Year Ended
In thousands	January 28, 2017			January 30, 2016
Deferred tax assets:
Net operating loss carryforward	$	27,396		$	18,872
Reserves for lease obligations		5,107			7,623
Pension, stock compensation, postretirement and employee benefits		412,391			380,523
Leases		57,223			51,823
Accruals and reserves		67,662			60,498
Other		48,463			31,077
Total gross deferred tax assets	$	618,242		$	550,416
Valuation allowance		(29,273	)		(11,998	)
Net deferred tax asset	$	588,969		$	538,418
Deferred tax liabilities:
Property, plant and equipment	$	569,377		$	539,818
Capitalized inventory		51,077			47,374
Tradename/intangibles		51,976			49,111
Undistributed foreign earnings		213,948			167,968
Other		10,398			5,418
Total deferred tax liabilities	$	896,776		$	809,689
Net deferred tax (liability)	$	(307,807	)	$	(271,271	)
Non-current asset	$	6,193		$	13,831
Non-current liability		(314,000	)		(285,102	)
Total	$	(307,807	)	$	(271,271	)

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes.” This guidance requires deferred tax liabilities, deferred tax assets and valuation allowances be classified as non-current in a classified balance sheet. This ASU is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted and may be applied either prospectively or retrospectively to all periods presented. TJX has elected to early adopt the new reporting standard retrospectively on its fiscal 2016 consolidated financial statements.

TJX has provided for deferred U.S. taxes on all undistributed earnings through January 28, 2017 from its subsidiaries in Canada, Puerto Rico, Italy, India and Hong Kong. For all other foreign subsidiaries, no U.S. income taxes have been provided on the approximately $785 million of undistributed earnings as of January 28, 2017 because such earnings are considered to be indefinitely reinvested in the business. A determination of the amount of unrecognized deferred tax liability related to the undistributed earnings is not practicable because of the complexities associated with the hypothetical calculations.

As of January 28, 2017, TJX had available for state income tax purposes net operating loss carryforwards of $99.2 million which expire, if unused, in the years 2018 through 2036. As of January 30, 2016, TJX had available for state income tax purposes net operating loss carryforwards of $62.4 million. TJX has analyzed the realization of the state net operating loss carryforwards on an individual state basis. For those states where the Company has determined that it is more likely than not that the state net operating loss carryforwards will not be realized, a valuation allowance of $6.8 million has been provided for the deferred tax asset as of January 28, 2017 and $5.1 million as of January 30, 2016.

As of January 28, 2017 and January 30, 2016, the Company had available for foreign income tax purposes (related to Australia, Austria and the Netherlands) net operating loss carryforwards of $75 million and $51.1 million, of which $4.4 million and $3.9 million will expire, if unused, in fiscal 2025 and 2026 respectively. The remaining loss carryforwards do not expire. For the deferred tax assets associated with the net operating loss carryforwards for which management has determined it is more likely than not that the deferred tax assets will not be realized, TJX had valuation allowances recorded of approximately $22.5 million as of January 28, 2017 and approximately $6.9 million as of January 30, 2016.

The difference between the U.S. federal statutory income tax rate and TJX’s worldwide effective income tax rate is reconciled below:


	Fiscal Year Ended
	January 28, 2017			January 30, 2016			January 31, 2015
U.S. federal statutory income tax rate		35.0	%		35.0	%		35.0	%
Effective state income tax rate		3.5			3.5			3.6
Impact of foreign operations		(0.2	)		(0.7	)		(0.9	)
All other		—			(0.1	)		(0.1	)
Worldwide effective income tax rate		38.3	%		37.7	%		37.6	%

TJX’s effective income tax rate increased for fiscal 2017 as compared to fiscal 2016. The increase in the effective income tax rate was primarily due to the jurisdictional mix of income and the increase in valuation allowance on foreign net operating losses.

TJX had net unrecognized tax benefits (net of federal benefit on state issues) of $38.5 million as of January 28, 2017, $34.1 million as of January 30, 2016 and $32.7 million as of January 31, 2015.

A reconciliation of the beginning and ending gross amount of unrecognized tax benefits is as follows:


	Fiscal Year Ended
In thousands	January 28, 2017			January 30, 2016			January 31, 2015
Balance at beginning of year	$	43,326		$	55,619		$	48,680
Additions for uncertain tax positions taken in current year		7,018			2,248			4,771
Additions for uncertain tax positions taken in prior years		327			11,707			5,278
Reductions for uncertain tax positions taken in prior years		(334	)		(23,874	)		(2,747	)
Reductions resulting from lapse of statute of limitations		(1,245	)		(389	)		—
Settlements with tax authorities		—			(1,985	)		(363	)
Balance at end of year	$	49,092		$	43,326		$	55,619

Included in the gross amount of unrecognized tax benefits are items that will impact future effective tax rates upon recognition. These items amounted to $43.8 million as of January 28, 2017, $39.0 million as of January 30, 2016 and $34.8 million as of January 31, 2015.

TJX is subject to U.S. federal income tax as well as income tax in multiple state, local and foreign jurisdictions. In the U.S., fiscal years through 2010 are no longer subject to examination. In Canada, fiscal years through 2008 are no longer subject to examination. In all other jurisdictions, fiscal years through 2009 are no longer subject to examination.

TJX follows the with and without approach for direct and indirect effects of windfall tax deductions. TJX’s accounting policy is to classify interest and penalties related to income tax matters as part of income tax expense. The amount of interest and penalties expensed was $1.4 million for the year ended January 28, 2017, $1.6 million for the year ended January 30, 2016 and $1.9 million for the year ended January 31, 2015. The accrued amounts for interest and penalties are $8.0 million as of January 28, 2017, $7.0 million as of January 30, 2016 and $10.1 million as of January 31, 2015.

Based on the final resolution of tax examinations, judicial or administrative proceedings, changes in facts or law, expirations of statute of limitations in specific jurisdictions or other resolutions of, or changes in, tax positions, it is reasonably possible that unrecognized tax benefits for certain tax positions taken on previously filed tax returns may change materially from those represented on the financial statements as of January 28, 2017. During the next twelve months, it is reasonably possible that state tax audit resolutions may reduce unrecognized tax benefits by $0 to $13 million, which would reduce the provision for taxes on earnings.