INCOME TAXES

Income (loss) from operations before income taxes in fiscal 2016, 2015 and 2014 is presented below:



	Year Ended June 30,
	2016			2015			2014
United States	$	(153.6	)	$	(173.7	)	$	(119.1	)
Foreign	292.4			407.0			75.0
Total	$	138.8		$	233.3		$	(44.1	)

The components of the Company’s total (benefit) provision for income taxes during fiscal 2016, 2015 and 2014 are presented below:



	Year Ended June 30,
	2016			2015			2014
(Benefit) provision for income taxes:
Current:
Federal	$	(30.0	)	$	3.7		$	5.6
State and local	(2.7		)	3.3			2.1
Foreign	131.5			54.1			50.8
Total	98.8			61.1			58.5
Deferred:
Federal	(91.7		)	(71.0		)	(30.6		)
State and local	(9.9		)	(12.0		)	(0.7		)
Foreign	(37.6		)	(4.2		)	(7.1		)
Total	(139.2		)	(87.2		)	(38.4		)
(Benefit) provision for income taxes	$	(40.4	)	$	(26.1	)	$	20.1

During the first quarter of fiscal 2016, the Company reached final settlement with the IRS in connection with the 2004–2012 examination periods. The settlement primarily relates to the acquisition of the Calvin Klein fragrance business. In connection with the settlement, the Company recognized a tax benefit of approximately $194.4 of which $164.7 was mainly due to the recognition of additional deferred tax assets related to the basis of the Calvin Klein trademark, and approximately $29.7 resulted from the reduction of gross unrecognized tax benefits. Of the $194.4 tax benefit, $111.2 was offset by a valuation allowance due to on-going operating losses in the U.S.

During fiscal 2015, the Company transferred certain international intellectual property rights to its wholly-owned subsidiary in Switzerland in order to align the Company’s ownership of these international intellectual property rights with its global operations. Although the transfer of foreign intellectual property rights between consolidated entities did not result in any gain in the consolidated results of operations, the Company generated a taxable gain in the U.S. that was offset by net operating loss carryforwards. Income taxes incurred related to the intercompany transactions are treated as a prepaid income tax in the Company’s consolidated balance sheet and amortized to income tax expense over the life of the intellectual property. The prepaid income tax is included in Prepaid expenses and other current assets and Other noncurrent assets in the Consolidated Balance Sheet in the amounts of $7.6 and $7.6 and $135.8 and $143.4, respectively, for the fiscal year end June 30, 2016 and 2015, respectively. The prepaid income taxes are amortized as a component of income tax expense over twenty years.

The reconciliation of the U.S. Federal statutory tax rate to the Company’s effective income tax rate during fiscal 2016, 2015 and 2014 is presented below:



	Year Ended June 30,
	2016			2015			2014
Income (loss) before income taxes	$	138.8		$	233.3		$	(44.1	)
Provision (benefit) for income taxes at statutory rate	$	48.5		$	81.7		$	(15.4	)
State and local taxes—net of federal benefit	(8.3		)	(5.6		)	0.9
Foreign tax differentials	(50.8		)	(74.4		)	(53.0		)
Change in valuation allowances	(7.6		)	(6.6		)	36.1
Change in unrecognized tax benefit	45.8			(16.0		)	(24.4		)
Asset impairment charges	—			—			67.4
U.S. audit settlement, net	(83.2		)	(19.2		)	—
Share-based compensation	—			—			1.8
Permanent differences—net	4.7			10.6			1.8
Amortization on intercompany sale	5.7			—			—
Other	4.8			3.4			4.9
(Benefit) provision for income taxes	$	(40.4	)	$	(26.1	)	$	20.1
Effective income tax rate	(29.1		)%	(11.2		)%	(45.6		)%

Significant components of Deferred income tax assets and liabilities as of June 30, 2016 and 2015 are presented below:



	June 30, 2016			June 30, 2015
Deferred income tax assets:
Inventories	$	19.3		$	14.0
Accruals and allowances	53.0			77.0
Sales returns	13.6			15.9
Share-based compensation	14.6			26.1
Employee benefits	64.8			38.4
Net operating loss carry forwards and tax credits	237.7			92.4
Other	23.8			27.2
Less: valuation allowances	(179.2		)	(81.9		)
Net deferred income tax assets	247.6			209.1
Deferred income tax liabilities:
Intangible assets	367.3			436.0
Unrealized gain	49.1			—
Licensing rights	26.6			6.3
Other	22.5			29.7
Deferred income tax liabilities	465.5			472.0
Net deferred income tax liabilities	$	(217.9	)	$	(262.9	)

Deferred tax assets relating to tax benefits of stock-based compensation have been reduced to reflect exercises of stock options to the extent recognized for financial statement purposes. Some exercises resulted in tax deductions in excess of previously recorded benefits at the time of grant. These excess tax benefits are not recognized in the deferred tax balances until the deductions reduce taxes payable. Accordingly, there is an additional $11.0 of net operating losses which are not reflected as part of the net deferred tax assets.

The expirations of tax loss carry forwards, amounting to $600.2 as of June 30, 2016, in each of the fiscal years ending June 30, are presented below:



Fiscal Year Ending June 30	United States		Western Europe		Rest of World		Total
2017	$	—	$	—	$	27.2	$	27.2
2018	—		—		29.7		29.7
2019	—		—		4.1		4.1
2020	—		—		67.6		67.6
2021 and thereafter	402.6		28.2		40.8		471.6
Total	$	402.6	$	28.2	$	169.4	$	600.2

The total valuation allowances recorded are $179.2 and $81.9 as of June 30, 2016 and 2015, respectively. In fiscal 2016, the change in the valuation allowance was due primarily to a decrease in valuation allowance for net operating losses.

A reconciliation of the beginning and ending amount of UTBs is presented below:



	Year Ended June 30,
	2016			2015			2014
UTBs—July 1	$	342.6		$	400.5		$	331.4
Additions based on tax positions related to the current year	60.4			51.6			29.5
Additions for tax positions of prior years	—			6.4			91.9
Reductions for tax positions of prior years	(70.5		)	(60.3		)	(9.9		)
Settlements	(72.7		)	(29.7		)	(33.8		)
Lapses in statutes of limitations	(37.9		)	(14.2		)	(11.6		)
Foreign currency translation	7.0			(11.7		)	3.0
UTBs—June 30	$	228.9		$	342.6		$	400.5

As of June 30, 2016, the Company had $228.9 of UTBs of which $122.8 represents the amount that, if recognized, would impact the effective income tax rate in future periods. As of June 30, 2016 and 2015, the liability associated with UTBs, including accrued interest and penalties, is $131.9 and $182.9, respectively, which is recorded in Income and other taxes payable and Other non-current liabilities in the Consolidated Balance Sheets.

During fiscal 2016, the Company accrued interest of $1.2, while in fiscal 2015 and 2014 the Company released interest of ($4.4) and $(1.7), respectively. During fiscal 2016, the Company accrued penalty of $0.1, while in fiscal 2015 and 2014 the Company released penalty of $(1.0) and nil, respectively. The total gross accrued interest and penalties recorded in the Other noncurrent liabilities in the Consolidated Balance Sheets related to UTBs as of June 30, 2016 and 2015 is $9.9 and $15.2, respectively.

The Company is present in over 35 tax jurisdictions, and at any point in time is subject to several audits at various stages of completion. As a result, the Company evaluates tax positions and establishes liabilities for UTBs that may be challenged by local authorities and may not be fully sustained, despite a belief that the underlying tax positions are fully supportable. UTBs are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law, and closing of statute of limitations. Such adjustments are reflected in the provision for income taxes as appropriate. In fiscal 2016 and 2015, the Company recognized a tax benefit of $51.4 and $62.0 respectively associated with the settlement of tax audits in multiple jurisdictions and the expiration of foreign and state statutes of limitation. The Company has open tax years ranging from 2009 and forward.

On the basis of information available at June 30, 2016, it is reasonably possible that a decrease of up to $15.5 in UTBs related to U.S. and foreign exposures may be necessary within the coming year. It is also possible the ongoing audits by tax authorities may result in increases or decreases to the balance of UTBs. Since it is common practice to extend audits beyond the Statute of Limitations, the Company is unable to predict the timing or conclusion of these audits and, accordingly, the Company is unable to estimate the amount of changes to the balance of UTBs that are reasonably possible at this time. However, the Company believes it has adequately provided for its UTBs for all open tax years in each tax jurisdiction.

It is the Company’s intention to permanently reinvest undistributed earnings and income from the Company’s foreign operations that have been generated through June 30, 2016. Accordingly, no provision has been made for U.S. income taxes on the remaining undistributed earnings of foreign subsidiaries as of June 30, 2016. Cumulative undistributed earnings of non-U.S. subsidiaries was $2,426.0 as of June 30, 2016. It is not practicable for the Company to determine the amount of additional income and withholding taxes that may be payable in the event the undistributed earnings are repatriated.