NOTE 7 - INCOME TAXES

Income before provision for income taxes on a legal entity basis consists of the following (in thousands):

	2015		2014		2013
U.S. income before taxes	$	34,099	$	26,591	$	11,721
Non-U.S. income before tax	$	37,065	$	42,327	$	37,335

The Company conducts business globally and, as a result, is subject to income taxes in the U.S. federal, state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in many countries, including Switzerland, Hong Kong, Germany, Canada and the United States. The Company is no longer subject to income tax examinations by tax authorities in Switzerland for years ended prior to January 31, 2006 and, with few exceptions, in the rest of the world for years ended prior to January 31, 2011.

The provision for /(benefit from) income taxes for the fiscal years ended January 31, 2015, 2014 and 2013 consists of the following components (in thousands):

	2015		2014			2013
Current:
U.S. Federal	$	8,412	$	7,296		$	2,365
U.S. State and Local		770		866			499
Non-U.S.		3,945		5,043			3,559
		13,127		13,205			6,423
Deferred:
U.S. Federal		3,763		183			(18,141)
U.S. State and Local		420		(888	)		(495)
Non-U.S.		1,954		4,873			3,401
		6,137		4,168			(15,235	)
Provision for / (benefit from) income taxes	$	19,264	$	17,373		$	(8,812)

Significant components of the Company’s deferred income tax assets and liabilities as of January 31, 2015 and 2014 are as follows (in thousands):

	2015 Deferred Taxes					2014 Deferred Taxes
	Assets			Liabilities		Assets			Liabilities
Net operating loss carryforwards	$	9,231		$	—	$	9,797		$	—
Inventory		3,112			—		4,294			—
Unprocessed returns		1,565			—		3,364			—
Receivables allowances		951			—		1,254			230
Deferred compensation		14,098			—		10,988			—
Unrepatriated earnings		—			2,715		—			2,724
Capital loss carryforwards		790					1,292			—
Depreciation/amortization		—			307		4,205			2,286
Other provisions/accruals		91			—		2,788			—
Miscellaneous		955			—		738			—
		30,793			3,022		38,720			5,240
Valuation allowance		(8,307	)		—		(7,798	)		—
Total deferred tax assets and liabilities	$	22,486		$	3,022	$	30,922		$	5,240

As of January 31, 2015, the Company had no U.S. federal net operating loss carryforwards and had U.S. State and foreign net operating loss carryforwards of approximately $16.7 million and $27.5 million, respectively, with expiration dates ranging from 1-20 years and some foreign jurisdictions with an indefinite carryforward period. Of the foreign net operating losses, $15.8 million are related to Switzerland and the remaining is primarily related to Germany.

A valuation allowance is required to be established unless management determines it is more likely than not that the Company will ultimately utilize the tax benefit associated with a deferred tax asset. During fiscal 2015, the Company released approximately $0.5 million of a valuation allowance related to a capital loss carryforward due to the utilization of such loss to offset capital gains generated by the Company’s Supplemental Executive Retirement Plan. As of January 31, 2015, the Company had a deferred tax asset of approximately $0.8 million related to a domestic capital loss carryforward for which a full valuation allowance has been recorded. Additionally, the Company has U.S. State and foreign valuation allowances of $0.2 million and $7.3 million, respectively, which are primarily related to net operating loss carryforwards.

Management will continue to evaluate the appropriate level of valuation allowance on all deferred tax assets considering such factors as prior earnings history, expected future earnings, carryback and carryforward periods, and tax and business strategies that could potentially enhance the likelihood of realization of the deferred tax assets.

The recognition of deductible windfall tax benefits related to stock-based compensation is prohibited until realized through a reduction to income taxes payable. Windfall tax benefits of $1.3 million, $0.9 million and $1.4 million, were recorded in additional paid-in-capital during fiscal years 2015, 2014 and 2013, respectively.

The provision for / (benefit from) income taxes differs from the U.S. federal statutory rate due to the following (in thousands):

	Fiscal Year Ended January 31,
	2015			2014			2013
Provision for income taxes at the U.S. statutory rate	$	24,906		$	24,121		$	17,169
Lower effective non-U.S. income tax rate		(7,257	)		(6,950	)		(6,006	)
Change in valuation allowance		1,298			(996	)		(19,526	)
U.S. tax provided on earnings of non-U.S. subsidiaries		639			580			109
Change in liabilities for uncertain tax positions, net		179			(652)			554
State and local taxes, net of federal benefit		693			719			607
Foreign legal reorganizations		—			—			(1,902)
(Benefit) provided on intercompany transactions		(1,652	)
Other, net		458			551			183
Total provision for / (benefit from) income taxes	$	19,264		$	17,373		$	(8,812	)

The effective tax rate for fiscal 2015 was 27.1%, primarily as a result of foreign profits being taxed in lower taxing jurisdictions and the recognition of a tax benefit related to intercompany profit in certain jurisdictions. The effective tax rate for fiscal 2014 was 25.2%, primarily as a result of foreign profits being taxed in lower taxing jurisdictions and the release of liabilities for uncertain tax positions as a result of favorable U.S. and foreign audit settlements partially offset by no tax being realized on certain foreign net operating losses.

The effective tax rate for fiscal 2013 was (18.0)%, primarily due to the release of a valuation allowance against net deferred tax assets in the United States, and the $1.9 million net tax benefit related to foreign legal reorganizations in Japan and the UK. In the third quarter of fiscal 2013, the Company concluded, based upon all available evidence, it was more likely than not that it’s domestic consolidated group would have sufficient future taxable income to realize its net deferred tax assets. As a result, the Company reversed the majority of the related valuation allowance, resulting in a non-cash deferred tax benefit of $19.5 million. The Company based its conclusion on the three year cumulative profit position as of October 31, 2012, domestic projections of future taxable income, positive Company results and the continued positive trend experienced by the retail industry during calendar 2012. While the Company believes the assumptions included in its projections of future taxable income for the domestic consolidated group are reasonable, if the actual results vary from expected results due to unforeseen changes in the worldwide economy or retail industry, or other factors, the Company may need to make future adjustments to the valuation allowance for all, or a portion, of the net deferred tax assets.

The Company performs a quarterly assessment reviewing its global cash projections and investment needs, considers such factors as projected future results, continued need for investment in the overseas business as well as cash needs in the U.S., among other countries. During fiscal years 2015, 2014 and 2013, the Company has identified all current year foreign subsidiary earnings as permanently reinvested.

The Company has recorded a federal income tax liability of $2.7 million related to $12.8 million of pre-2013 foreign earnings which have been earmarked for future repatriation. A deferred tax liability has not been recorded for the remaining undistributed foreign earnings of approximately $244 million, because the Company intends to permanently reinvest such earnings in its foreign operations. It is not practicable to estimate the amount of tax that may be payable on the eventual distribution of these earnings.

A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits (exclusive of interest) for January 31, 2015, 2014 and 2013 are as follows (in thousands):

	2015		2014			2013
Beginning balance	$	2,740	$	3,602		$	3,216
Additions for tax positions of prior years		—		959			475
Additions for tax positions taken in the current year		128		—			—
Lapse of statute of limitations		(34)		(1,214	)		(98	)
Settlements		—		(605	)		(51)
Non U.S. currency exchange fluctuations		(177)		(2)			60
Ending balance	$	2,657	$	2,740		$	3,602

Included in the balances at January 31, 2015, January 31, 2014 and January 31, 2013 are $2.5 million, $2.6 million, and $3.0 million of unrecognized tax benefits which would impact the Company’s effective tax rate, if recognized. Interest and penalties, if any, related to unrecognized tax benefits are recorded as income tax expense in the consolidated statement of operations. As of January 31, 2015, January 31, 2014 and January 31, 2013, the Company had $0.7 million, $0.7 million and $1.5 million, respectively of accrued interest (net of tax benefit) and penalties related to unrecognized tax benefits. During fiscal years 2015, 2014 and 2013, the Company accrued $0.1 million, $0.1 million and $0.2 million of interest (net of tax benefit) and penalties.

We believe that our income tax reserves are adequate; however, amounts asserted by taxing authorities could be greater or less than amounts accrued and reflected in our consolidated balance sheet. Accordingly, we could record adjustments to the amounts for federal, state, and foreign liabilities in the future as we revise estimates or we settle or otherwise resolve the underlying matters. In the ordinary course of business, we may take new positions that could increase or decrease our unrecognized tax benefits in future periods.