INCOME TAXES

Income from continuing operations before taxes was comprised of (in thousands) (amounts restated due to change in accounting principle referenced in Note 4):



	2012		2011		2010
Domestic	$	302,589	$	192,312	$	188,444
Foreign	64,356		25,495		45,374
Total	$	366,945	$	217,807	$	233,818

Domestic income from continuing operations above includes intercompany charges to foreign affiliates for management fees, cost-sharing, royalties, including those related to international direct-to-consumer operations, and interest. The provision for tax expense from continuing operations consisted of (in thousands):



	2012			2011			2010
Current:
Federal	$	111,761		$	100,495		$	94,922
State	15,323			11,085			16,126
Foreign	17,984			13,262			11,395
	$	145,068		$	124,842		$	122,443
Deferred:
Federal	$	(10,456	)	$	(32,776	)	$	(33,441	)
State	458			(8,662		)	(7,299		)
Foreign	(5,136		)	(8,735		)	(3,594		)
	$	(15,134	)	$	(50,173	)	$	(44,334	)
Total provision	$	129,934		$	74,669		$	78,109

Reconciliation between the statutory federal income tax rate and the effective tax rate for continuing operations is as follows:



	2012		2011		2010
Federal income tax rate	35.0	%	35.0	%	35.0	%
State income tax, net of federal income tax effect	2.7		3.9		2.5
Tax effect of foreign earnings	(1.8	)	(3.0	)	(3.7	)
Other items, net	(0.5	)	(1.6	)	(0.4	)
Total	35.4	%	34.3	%	33.4	%

Amounts paid directly to taxing authorities were $122.7 million, $118.2 million, and $85.1 million in Fiscal 2012, Fiscal 2011, and Fiscal 2010, respectively.

The effect of temporary differences which gives rise to deferred income tax assets (liabilities) were as follows (in thousands):



	2012			2011
Deferred tax assets:
Deferred compensation	$	83,529		$	69,296
Accrued expenses	18,971			20,356
Rent	39,061			41,424
Foreign net operating losses (NOLs)	12,107			11,687
Reserves	6,698			7,669
Realized and unrealized investment losses	592			5,565
Valuation allowance	(158		)	(2,531		)
Total deferred tax assets	$	160,800		$	153,466
Deferred tax liabilities:
Property and equipment	(57,875		)	(70,961		)
Inventory	(13,156		)	(8,164		)
Store supplies	(9,990		)	(10,591		)
Other	(2,140		)	(1,245		)
Total deferred tax liabilities	$	(83,161	)	$	(90,961	)
Net deferred income tax assets	$	77,639		$	62,505

Accumulated other comprehensive income is shown net of deferred tax assets and deferred tax liabilities, resulting in a deferred tax liability of $0.8 million and a deferred tax asset of $1.6 million for Fiscal 2012 and Fiscal 2011, respectively. These deferred taxes are not reflected in the table above.

As of February 2, 2013 and January 28, 2012, the Company had deferred tax assets related to foreign net operating loss carryovers that could be utilized to reduce future years’ tax liabilities, totaling $12.1 million and $11.7 million, respectively. A portion of these net operating loss carryovers begin expiring in the year 2016 and some have an indefinite carryforward period. Management believes it is more likely than not that these net operating loss carryovers will reduce future years’ tax liabilities in certain foreign jurisdictions less the associated valuation allowance. As of February 2, 2013 and January 28, 2012, the foreign subsidiaries’ net operating valuation allowances were immaterial and $2.5 million, respectively.

No other valuation allowances have been provided for deferred tax assets because management believes that it is more likely than not that the full amount of the net deferred tax assets will be realized in the future.

A reconciliation of the beginning and ending amounts of uncertain tax positions is as follows:



	2012			2011			2010
	(in thousands)
Uncertain tax positions, beginning of the year	$	13,404		$	14,827		$	29,437
Gross addition for tax positions of the current year	1,084			1,183			562
Gross addition for tax positions of prior years	227			1,602			1,734
Reductions of tax positions of prior years for:
Lapses of applicable statutes of limitations	(2,053		)	(2,448		)	(2,328		)
Settlements during the period	(1,480		)	(1,631		)	(14,166		)
Changes in judgment	(66		)	(129		)	(412		)
Uncertain tax positions, end of year	$	11,116		$	13,404		$	14,827

The amount of the above uncertain tax positions at February 2, 2013, January 28, 2012 and January 29, 2011 which would impact the Company’s effective tax rate, if recognized, was $11.1 million, $13.4 million and $14.8 million, respectively.

The Company recognizes accrued interest and penalties related to uncertain tax positions as a component of income tax expense. Interest and penalties of $4.9 million had been accrued, at the end of Fiscal 2012, compared to $6.1 million accrued at the end of Fiscal 2011.

The Internal Revenue Service (“IRS”) is currently conducting an examination of the Company’s U.S. federal income tax return for Fiscal 2012 as part of the IRS’s Compliance Assurance Process program. IRS examinations for Fiscal 2011 and prior years have been completed and settled. State and foreign returns are generally subject to examination for a period of three to five years after the filing of the respective return. The Company has various state income tax returns in the process of examination or administrative appeals. The outcome of the examinations is not expected to have a material impact on the Company's financial statements. The Company believes that some of these audits and negotiations will conclude within the next 12 months and that it is reasonably possible the amount of uncertain income tax positions, including interest, may decrease in the range of $7 million to $12 million within the next 12 months due to settlement of audits and expiration of statutes of limitations, and a range of $2.5 million to $10 million of which would reduce income tax expense.

The Company does not expect material adjustments to the total amount of uncertain tax positions within the next 12 months, but the outcome of tax matters is uncertain and unforeseen results can occur.

As of February 2, 2013, U.S. taxes have not been provided on approximately $99.6 million of unremitted earnings of subsidiaries operating outside of the United States. These earnings, which are considered to be invested indefinitely, would become subject to income tax if they were remitted as dividends or were lent to Abercrombie & Fitch or a U.S. affiliate, or if Abercrombie & Fitch were to sell its stock in the subsidiaries. Determination of the amount of unrecognized deferred U.S. income tax liability on these unremitted earnings is not practicable because of the complexities associated with this hypothetical calculation.