Income Taxes

The following table provides the components of the Company’s provision for income taxes for 2011, 2010 and 2009:



	2011			2010			2009
	(in millions)
Current:
U.S. Federal	$	357		$	406		$	138
U.S. State	46			54			1
Non-U.S.	11			10			14
Total	414			470			153
Deferred:
U.S. Federal	6			(20		)	47
U.S. State	1			(3		)	8
Non-U.S.	(44		)	(1		)	(6		)
Total	(37		)	(24		)	49
Provision for Income Taxes	$	377		$	446		$	202

The foreign component of pre-tax income, arising principally from overseas operations, was a loss of $37 million for 2011, and income of $42 million and $84 million for 2010 and 2009, respectively. The 2011 loss included the impact of the $232 million impairment of goodwill and other intangible assets at La Senza as well as the foreign portion of the gain on the divestiture of the third-party apparel sourcing business of $105 million.

The Non-U.S. deferred benefit of $44 million is primarily the result of the reversal of a deferred tax liability associated with the La Senza trade name established upon the acquisition of La Senza.

The following table provides the reconciliation between the statutory federal income tax rate and the effective tax rate for 2011, 2010 and 2009:



	2011		2010		2009
Federal Income Tax Rate	35.0	%	35.0	%	35.0	%
State Income Taxes, Net of Federal Income Tax Effect	4.0	%	3.5	%	3.7	%
Express Charitable Contribution	(5.0	)%	—	%	—	%
Deductible Loss on Divestiture of Limited Stores	—	%	(2.4	)%	—	%
Non-deductible Impairment of Goodwill and Other Intangible Assets	4.3	%	—	%	0.3	%
Foreign Portion of the Divestiture of Third-party Apparel Sourcing Business	(3.0	)%	—	%	—	%
Impact of Non-U.S. Operations	(2.2	)%	0.5	%	(5.0	)%
Other Items, Net	(2.4	)%	(1.0	)%	(2.9	)%
Effective Tax Rate	30.7	%	35.6	%	31.1	%

The Company’s effective tax rate has historically reflected a provision related to the undistributed earnings of foreign affiliates, but the related taxes are not paid until the earnings are deemed repatriated to the United States. The Company has historically recorded a deferred tax liability for those undistributed earnings. Currently, no deferred tax liability is recorded on foreign affiliated earnings as the tax basis is greater than the carrying value.

In the fourth quarter of 2009, the Company executed a re-organization of certain of its foreign subsidiaries which resulted in the recognition of a non-cash income tax benefit of $21 million associated with the reversal of deferred tax liabilities associated with undistributed earnings of a foreign subsidiary.

Deferred Taxes

The following table provides the effect of temporary differences that cause deferred income taxes as of January 28, 2012 and January 29, 2011. Deferred tax assets and liabilities represent the future effects on income taxes resulting from temporary differences and carryforwards at the end of the respective year.



	January 28, 2012									January 29, 2011
	Assets			Liabilities			Total			Assets			Liabilities			Total
	(in millions)
Leases	$	45		$	—		$	45		$	39		$	—		$	39
Non-qualified Retirement Plan	82			—			82			73			—			73
Inventory	—			—			—			7			—			7
Property and Equipment	—			(190		)	(190		)	—			(154		)	(154		)
Goodwill	—			(15		)	(15		)	—			(15		)	(15		)
Trade Names and Other Intangibles	—			(139		)	(139		)	—			(183		)	(183		)
Charitable Contribution Carryforwards	23			—			23			—			—			—
State Net Operating Loss Carryforwards	26			—			26			31			—			31
Non-U.S. Operating Loss Carryforwards	40			—			40			38			—			38
Valuation Allowance	(59		)	—			(59		)	(50		)	—			(50		)
Other, Net	55			—			55			45			—			45
Total Deferred Income Taxes	$	212		$	(344	)	$	(132	)	$	183		$	(352	)	$	(169	)

As of January 28, 2012, the Company had available for state income tax purposes net operating loss carryforwards which expire, if unused, in the years 2012 through 2028. The Company 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 has been provided for the deferred tax asset.

As of January 28, 2012, the Company had available for non-U.S. tax purposes net operating loss carryforwards which expire, if unused, in the years 2027 through 2031. The Company has determined that it is more likely than not that all of the net operating loss carryforwards will not be realized and a valuation allowance has been provided for the net deferred tax assets, including the net operating loss carryforwards, of the related tax loss entity.

Income tax payments were $400 million for 2011, $376 million for 2010 and $118 million for 2009.

Uncertain Tax Positions

The following table summarizes the activity related to the Company’s unrecognized tax benefits for U.S. federal, state & non-U.S. tax jurisdictions for 2011, 2010 and 2009, without interest and penalties:



	2011			2010			2009
	(in millions)
Gross Unrecognized Tax Benefits, as of the Beginning of the Fiscal Year	$	147		$	115		$	116
Increases in Unrecognized Tax Benefits for Prior Years	4			17			18
Decreases in Unrecognized Tax Benefits for Prior Years	(33		)	(17		)	(31		)
Increases in Unrecognized Tax Benefits as a Result of Current Year Activity	45			40			26
Decreases to Unrecognized Tax Benefits Relating to Settlements with Taxing Authorities	(9		)	(2		)	(9		)
Decreases to Unrecognized Tax Benefits as a Result of a Lapse of the Applicable Statute of Limitations	(8		)	(6		)	(6		)
Foreign Currency Translation	—			—			1
Gross Unrecognized Tax Benefits, as of the End of the Fiscal Year	$	146		$	147		$	115

Of the $146 million, $147 million and $115 million of total unrecognized tax benefits at January 28, 2012, January 29, 2011, and January 30, 2010, respectively, approximately $131 million, $130 million and $100 million, respectively, represent the amount of unrecognized tax benefits that if recognized would favorably affect the effective income tax rate in future periods. These amounts are net of the offsetting tax effects from other tax jurisdictions.

Of the total unrecognized tax benefits, it is reasonably possible that $96 million could change in the next twelve months due to audit settlements, expiration of statute of limitations or other resolution of uncertainties. Due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in amounts which could be different from this estimate. In such case, the Company will record additional tax expense or tax benefit in the period in which such matters are effectively settled.

The Company recognizes interest and penalties related to unrecognized tax benefits as components of income tax expense. The Company recognized interest and penalties benefit of $7 million in 2011, expense of $2 million in 2010 and benefit of $7 million in 2009. The Company has accrued approximately $25 million and $32 million for the payment of interest and penalties as of January 28, 2012 and January 29, 2011, respectively. Accrued interest and penalties are included within Other Long-term Liabilities on the Consolidated Balance Sheets.

The Company files U.S. federal income tax returns as well as income tax returns in various states and in non-U.S. jurisdictions. At the end of 2011, the Company was subject to examination by the IRS for 2008 through 2010. The Company is also subject to various U.S. state and local income tax examinations for the years 2004 to 2010. Finally, the Company is subject to multiple non-U.S. tax jurisdiction examinations for the years 2001 to 2010. In some situations, the Company determines that it does not have a filing requirement in a particular tax jurisdiction. Where no return has been filed, no statute of limitations applies. Accordingly, if a tax jurisdiction reaches a conclusion that a filing requirement does exist, additional years may be reviewed by the tax authority. The Company believes it has appropriately accounted for uncertainties related to this issue.