|12 Months Ended|
Feb. 03, 2018
8. INCOME TAXES
Earnings (loss) before income taxes (in thousands):
The provision (benefit) for income taxes consists of the following (in thousands):
In December 2017, the U.S. enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”). The changes included in the Tax Reform Act are broad and complex, which impacted our consolidated financial statements in fiscal 2017 including, but not limited to: reducing the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018 and requiring a one-time transition tax on certain unrepatriated earnings of non-U.S. subsidiaries that may electively be paid over eight years. The transition tax resulted in certain previously untaxed non-U.S. earnings being included in the U.S. federal and state 2017 taxable income.
The Tax Reform Act also enacted new tax laws which include, but are not limited to: a Base Erosion Anti-abuse Tax (“BEAT”), which is a new minimum tax, generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, a provision designed to tax currently global intangible low taxed income (“GILTI”), a provision that may limit the amount of currently deductible interest expense, the repeal of the domestic production incentives, limitations on the deductibility of certain executive compensation, and limitations on the utilization of foreign tax credits to reduce the U.S. income tax liability.
Shortly after the Tax Reform Act was enacted, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) which provides guidance on accounting for the Tax Reform Act’s impact. SAB 118 provides a measurement period, which in no case should extend beyond one year from the Tax Reform Act enactment date, during which a company acting in good faith may complete the accounting for the impacts of the Tax Reform Act. In accordance with SAB 118, a company must reflect the income tax effects of the Tax Reform Act in the reporting period in which the accounting is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Reform Act is incomplete, a company can determine a reasonable estimate for those effects and record a provisional estimate in the financial statements in the first reporting period in which a reasonable estimate can be determined.
As a result, we have recorded a provisional discrete net tax benefit of $0.3 million related to the Tax Reform Act in fiscal 2017 which is made up of a benefit from the deferred tax remeasurement offset by additional provision for the transition tax. While we have made a reasonable estimate of the impact of the Tax Reform Act, we are continuing to finalize the consequences of tax reform, including the temporary differences that existed on the date of enactment.
Furthermore, as a result of the Tax Reform Act, the Company is currently analyzing its global working capital requirements and the potential tax liabilities that would be incurred if certain non-U.S. subsidiaries made distributions, which include local country withholding tax and potential U.S. state taxation. In prior years, no provision for U.S. income taxes or Canadian withholding taxes had been made on the cumulative undistributed earnings of foreign companies because we intended to permanently reinvest all the foreign earnings outside the U.S. In response to the Tax Reform Act, we no longer intend to permanently reinvest our foreign earnings. As a result, the Company has included a provisional estimate of incremental withholding liabilities on its investment in foreign earnings totaling $17.3 million.
Lastly, we are also currently analyzing other provisions of the Tax Reform Act that become effective in fiscal 2018. These provisions include eliminating U.S. federal income taxes on dividends from foreign subsidiaries, the treatment of amounts in accumulated other comprehensive income, potential limitations on the amount of currently deductible interest expense, and the limitations on the deductibility of certain executive compensation. The impact of these provisions may result in future adjustments of estimates included in our fiscal 2017 financial statements.
A reconciliation of the statutory federal income tax rate to our effective tax rate is as follows:
In fiscal 2017, our effective income tax rate was 28.3% and is lower than the U.S. statutory rate primarily due to foreign earnings and the lower tax rates in these jurisdictions and the release of specific uncertain tax positions liabilities, partially offset by a change in our position on permanently reinvested foreign earnings and valuation allowance changes. In fiscal 2016, our effective income tax rate was 21.0% and is lower than the U.S. statutory rate primarily due to foreign earnings and lower tax rates in these jurisdictions. Our effective tax rate is affected by recurring items, such as tax rates in foreign jurisdictions, which are lower than the federal rate, and the amounts we earn in those jurisdictions.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that a portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of February 3, 2018, it is more likely than not that we will realize the benefits of the deferred tax assets, except as discussed below.
At February 3, 2018 and January 28, 2017, we had net non-current deferred tax liabilities of $68.8 million and $70.6 million, respectively. The decrease in the net deferred tax liabilities is primarily due to the change in the federal statutory rate as a result of the Tax Reform Act. We have a valuation allowance of $19.5 million against certain state deferred tax assets and foreign tax credits for which we have concluded it is more likely than not that we will not recognize the asset.
Total deferred tax assets and liabilities and the related temporary differences as of February 3, 2018 and January 28, 2017 were as follows (in thousands):
In accordance with the guidance regarding accounting for uncertainty in income taxes, we classify uncertain tax positions as non‑current income tax liabilities unless expected to be paid within one year and recognize interest and/or penalties related to income tax matters in income tax expense. As of February 3, 2018 and January 28, 2017, the total amount of accrued interest related to uncertain tax positions was $0.2 million and $1.5 million, respectively.
The following table summarizes the activity related to our uncertain tax positions (in thousands):
Of the $1.2 million in uncertain tax positions as of February 3, 2018, $1.2 million, if recognized, would reduce our income tax expense and effective tax rate. We do not expect material changes in the total amount of uncertain tax positions within the next 12 months as the outcome of tax matters is uncertain and unforeseen results can occur.
We are subject to routine compliance examinations on tax matters by various tax jurisdictions in the ordinary course of business. Tax return years which are open to examinations range from fiscal 2012 through fiscal 2016. Our tax jurisdictions include the United States, Canada, the UK, The Netherlands, Hong Kong and France as well as their states, territories, provinces and other political subdivisions. A number of U.S. state examinations are ongoing.
At February 3, 2018, we had federal, state and foreign net operating loss (“NOL”) carryforwards of approximately $12.5 million, $132.3 million and $1.5 million, respectively. The federal and state NOL carryforwards will expire between fiscal 2018 and 2037; the foreign NOLs can be carried forward indefinitely. At February 3, 2018, we also have $11.0 million of foreign tax credit carryforwards, which will expire between fiscal 2019 and fiscal 2027.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://www.xbrl.org/2003/role/presentationRef