Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The approximate tax effect of the significant components of Staples' deferred tax assets and liabilities, including those related to discontinued operations, are as follows (in thousands):



	February 1, 2014			February 2, 2013
Deferred income tax assets:
Deferred rent	$	34,953		$	39,410
Foreign tax credit carryforwards	6,775			66,422
Net operating loss carryforwards	333,920			335,604
Capital loss carryforwards	18,231			20,388
Employee benefits	124,356			134,959
Bad debts	16,356			15,978
Inventory	39,111			33,598
Insurance	36,312			38,588
Deferred revenue	16,143			52,025
Depreciation	56,768			29,652
Financing	30,629			31,220
Accrued expenses	18,505			21,475
Other—net	18,408			50,852
Total deferred income tax assets	750,467			870,171
Total valuation allowance	(414,258		)	(410,128		)
Net deferred income tax assets	$	336,209		$	460,043
Deferred income tax liabilities:
Intangibles	$	(142,772	)	$	(124,951	)
Other—net	(2,048		)	(3,125		)
Total deferred income tax liabilities	(144,820		)	(128,076		)
Net deferred income tax assets	$	191,389		$	331,967

The deferred tax asset from tax loss carryforwards of $333.9 million represents approximately $1.30 billion of net operating loss carryforwards, $658.2 million of which are subject to expiration beginning in 2014. The remainder has an indefinite carryforward period. The deferred tax asset from foreign tax credit carryforwards of $6.8 million is subject to expiration beginning in 2018. The valuation allowance increased by $4.1 million during 2013, primarily due to the establishment of valuation allowances in certain foreign jurisdictions and current year operating losses generated in foreign jurisdictions that the Company has determined are not more-likely-than-not realizable, partially offset by a decrease in the the valuation allowance associated with the expiration of net operating loss carryforwards against which a valuation allowance had been maintained.

For financial reporting purposes, income from continuing operations before income taxes includes the following components (in thousands):



	2013		2012			2011
Pretax income (loss):
United States	$	881,204	$	1,027,547		$	1,009,978
Foreign	181,601		(762,124		)	454,666
Income from continuing operations before income taxes	$	1,062,805	$	265,423		$	1,464,644

The provision (benefit) for income taxes related to continuing operations consists of the following (in thousands):



	2013		2012		2011
Current tax expense:
Federal	$	192,875	$	240,230	$	253,078
State	36,818		43,661		59,877
Foreign	21,322		30,231		159,872
Deferred tax expense (benefit):
Federal	72,721		77,824		75,233
State	5,551		5,837		(4,666		)
Foreign	26,514		28,487		(66,147		)
Total income tax expense	$	355,801	$	426,270	$	477,247

See Note D - Divestitures for the losses from discontinued operations before income taxes and related income taxes reported in 2013, 2012 and 2011. All pre-tax income presented in discontinued operations is related to foreign operations.

A reconciliation of the federal statutory tax rate to Staples' effective tax rate on income from continuing operations is as follows:



	2013		2012		2011
Federal statutory rate	35.0	%	35.0	%	35.0	%
State effective rate, net of federal benefit	2.6		12.1		2.6
Effect of foreign taxes	(7.8	)	(3.3	)	(5.1	)
Tax credits	(0.4	)	(0.8	)	(0.5	)
Italian tax refund (previously deemed uncollectible)	—		—		(1.4	)
Goodwill impairment	—		82.5		—
Change in valuation allowance	3.8		37.1		0.5
Other	0.3		(2.0	)	1.5
Effective tax rate	33.5	%	160.6	%	32.6	%

The effective tax rate in any year is impacted by the geographic mix of earnings. Additionally, certain foreign operations are subject to both U.S. and foreign income tax regulations, and as a result, income before tax by location and the components of income tax expense by taxing jurisdiction are not directly related. The 2012 effective tax rate was unfavorably impacted by the goodwill impairment charges recorded in 2012 relating to the Company's Europe Retail and Europe Catalog reporting units (see Note C - Goodwill and Long-Lived Assets).

The tax impact of the unrealized gain or loss on instruments designated as hedges of net investments in foreign subsidiaries is reported in accumulated other comprehensive loss in stockholders' equity.

The Company operates in multiple jurisdictions and could be subject to audit in these jurisdictions. These audits can involve complex issues that may require an extended period of time to resolve and may cover multiple years. In the Company's opinion, an adequate provision for income taxes has been made for all years subject to audit.

Income tax payments were $265.9 million, $402.9 million and $308.9 million during 2013, 2012 and 2011, respectively.

Income taxes have not been provided on the undistributed earnings of the Company's foreign subsidiaries presented in continuing operations of approximately $604 million because such earnings are considered to be indefinitely reinvested in the business. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable because of the complexities associated with its hypothetical calculation.

Uncertain Tax Positions

At February 1, 2014, the Company had $281.0 million of gross unrecognized tax benefits, of which $266.0 million, if recognized, would affect the Company's tax rate. At February 2, 2013, the Company had $254.7 million of gross unrecognized tax benefits, of which $242.9 million, if recognized, would affect the Company's tax rate. The Company does not reasonably expect any material changes to the estimated amount of liability associated with its uncertain tax positions through fiscal 2014.

The following summarizes the activity related to the Company's unrecognized tax benefits, including those related to discontinued operations (in thousands):



	2013			2012			2011
Balance at beginning of fiscal year	$	254,724		$	250,397		$	254,167
Additions for tax positions related to current year	28,390			39,989			48,032
Additions for tax positions of prior years	4,350			11,058			15,361
Reduction for statute of limitations expiration	(6,240		)	(30,116		)	(13,441		)
Settlements	(265		)	(16,604		)	(53,722		)
Balance at end of fiscal year	$	280,959		$	254,724		$	250,397

Staples is subject to U.S. federal income tax, as well as income tax of multiple state and foreign jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through 2007. All material state, local and foreign income tax matters for years through 2002 have been substantially concluded.

Staples' continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company recognized interest and penalties related to income tax matters of $9.1 million, $7.2 million and $2.6 million in 2013, 2012 and 2011, respectively. The Company had $46.7 million and $37.7 million accrued for gross interest and penalties as of February 1, 2014 and February 2, 2013, respectively.