15. Taxes

On October 29, 2014, the Board of Directors of MKHL approved a proposal to move the Company’s principal executive office from Hong Kong to the United Kingdom and to become a U.K. tax resident. The Company will remain incorporated in the British Virgin Islands. The Company has achieved tremendous international growth over the past several years and believes that moving its principal executive office to the U.K. will better position it for further expansion in Europe and internationally, and allow it to compete more effectively with other international luxury brands.

MKHL’s subsidiaries are subject to taxation in the U.S. and various other foreign jurisdictions, which are aggregated in the “Non-U.S” information captioned below.

Income before provision for income taxes consisted of the following (in thousands):


	Fiscal Years Ended
	March 28, 2015		March 29, 2014			March 30, 2013
U.S.	$	814,368	$	792,899		$	538,607
Non-U.S.		441,455		214,748			88,520

Total income before provision for income taxes	$	1,255,823	$	1,007,647		$	627,127


The provision for income taxes was as follows (in thousands):

	Fiscal Years Ended
	March 28, 2015		March 29, 2014			March 30, 2013
Current
U.S. Federal	$	277,001	$	295,159		$	179,014
U.S. State		49,645		50,348			32,249
Non-U.S.		41,922		30,560			15,040

Total current		368,568		376,067			226,303

Deferred
U.S. Federal		5,020		(24,847	)		1,246
U.S. State		331		(3,594	)		2,088
Non-U.S.		881		(1,464	)		(112	)

Total deferred		6,232		(29,905	)		3,222

Total provision for income taxes	$	374,800	$	346,162		$	229,525

MKHL is incorporated in the British Virgin Islands and is a tax resident of the U.K. However, since the proportion of the U.S. revenues, assets, operating income, and the associated tax provisions is significantly higher than any other single tax jurisdiction within the worldwide group, the reconciliation of the differences between the provision for income taxes and the statutory rate is presented on the basis of the U.S. statutory federal income tax rate of 35%. The following table summarizes the significant differences between the U.S. federal statutory tax rate and the Company’s effective tax rate for financial statement purposes:


	Fiscal Years Ended
	March 28, 2015			March 29, 2014			March 30, 2013
Federal tax at 35% statutory rate		35.0	%		35.0	%		35.0	%
State and local income taxes, net of federal benefit		2.4	%		2.3	%		3.6	%
Differences in tax effects on foreign income		-9.0	%		-3.9	%		-3.1	%
Foreign tax credit		-0.4	%		-0.2	%		-0.2	%
Liability for uncertain tax positions		0.2	%		0.8	%		0.5	%
Effect of changes in valuation allowances on deferred tax assets		-0.1	%		-0.2	%		0.3	%
Other		1.7	%		0.6	%		0.5	%

		29.8	%		34.4	%		36.6	%

Significant components of the Company’s deferred tax assets (liabilities) consist of the following (in thousands):


	March 28, 2015			March 29, 2014
Deferred tax assets
Inventories	$	11,194		$	11,380
Payroll related accruals		408			4,722
Deferred rent		30,428			24,281
Deferred revenue		—			2,389
Net operating loss carryforwards		5,860			7,743
Stock compensation		23,845			14,117
Sales allowances		10,090			7,654
Other		11,054			9,589

		92,879			81,875
Valuation allowance		(5,640	)		(8,020	)

Total deferred tax assets		87,239			73,855

Deferred tax liabilities
Goodwill and intangibles		(32,704	)		(24,324	)
Depreciation		(34,633	)		(20,691	)
Other		(3,910	)		(526	)

Total deferred tax liabilities		(71,247	)		(45,541	)

Net deferred tax assets	$	15,992		$	28,314

The Company maintains valuation allowances on deferred tax assets applicable to subsidiaries in jurisdictions for which separate income tax returns are filed and where realization of the related deferred tax assets from future profitable operations is not reasonably assured. Deferred tax valuation allowances increased approximately $0.2 million, $0.9 million and $1.6 million in Fiscal 2015, Fiscal 2014 and Fiscal 2013, respectively. As a result of the attainment and expectation of achieving profitable operations in certain countries comprising the Company’s European operations and certain state jurisdictions in the U.S., for which deferred tax valuation allowances had been previously established, the Company released valuation allowances amounting to approximately $2.6 million, $1.6 million, and $1.1 million in Fiscal 2015, Fiscal 2014 and Fiscal 2013, respectively.

The Company has non-U.S. net operating loss carryforwards of approximately $23.2 million that will begin to expire in 2017.

As of March 28, 2015 and March 29, 2014, the Company has liabilities related to its uncertain tax positions, including accrued interest, of approximately $21.2 million and $19.0 million, respectively, which are included in other long-term liabilities in the Company’s audited consolidated balance sheets.

The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was approximately $19.9 million, $18.1 million and $6.6 million as of March 28, 2015, March 29, 2014, and March 30, 2013, respectively. A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding accrued interest, for Fiscal 2015, Fiscal 2014, and Fiscal 2013, are presented below (in thousands):


	March 28, 2015			March 29, 2014			March 30, 2013
Unrecognized tax benefits beginning balance	$	18,087		$	6,628		$	1,758
Additions related to prior period tax positions		443			2,515			3,318
Additions related to current period tax positions		5,193			9,312			2,482
Decreases from prior period positions		(3,838	)		(368	)		(930	)

Unrecognized tax benefits ending balance	$	19,885		$	18,087		$	6,628

The Company classifies interest expense and penalties related to unrecognized tax benefits as components of the provision for income taxes. Interest expense recognized in the consolidated statements of operations for Fiscal 2015, Fiscal 2014, and Fiscal 2013 was approximately $1.3 million, $0.9 million and $0.3 million, respectively.

The total amount of unrecognized tax benefits relating to the Company’s tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing tax audits and assessments and the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly uncertain, the Company does not anticipate that the balance of gross unrecognized tax benefits, excluding interest and penalties, will change significantly during the next twelve months. However, changes in the occurrence, expected outcomes, and timing of such events could cause the Company’s current estimate to change materially in the future.

The Company files income tax returns in the U.S., for federal, state, and local purposes, and in certain foreign jurisdictions. With few exceptions, the Company is no longer subject to examinations by the relevant tax authorities for years prior to its fiscal year ended April 2, 2011.

The Company’s policy with respect to its undistributed earnings of the U.S. and non-U.S. subsidiaries is to consider those earnings to be either indefinitely reinvested or able to be repatriated tax-neutral. Undistributed earnings of subsidiaries considered to be either indefinitely reinvested or able to be repatriated tax-neutral amounted to $1.955 billion at March 28, 2015. Accordingly, as of March 28, 2015, the Company did not record a provision for withholding taxes on the excess of the amount recorded for financial reporting purposes over the related tax basis of investments in subsidiaries. Deferred taxes are recorded when a subsidiary’s earnings are no longer deemed to be indefinitely reinvested.