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):



	January 31, 2015			February 1, 2014
Deferred income tax assets:
Deferred rent	$	28,442		$	34,953
Foreign tax credit carryforwards	3,189			6,775
Net operating loss carryforwards	287,886			333,920
Capital loss carryforwards	26,514			18,231
Employee benefits	159,344			124,356
Bad debts	20,147			16,356
Inventory	24,906			39,111
Insurance	37,202			36,312
Deferred revenue	14,102			16,143
Depreciation	50,361			56,768
Financing	25,768			30,629
Accrued expenses	14,641			18,505
Store closures	34,802			4,725
Other—net	13,757			11,011
Total deferred income tax assets	741,061			747,795
Total valuation allowance	(350,304		)	(414,258		)
Net deferred income tax assets	$	390,757		$	333,537
Deferred income tax liabilities:
Intangibles	$	(141,911	)	$	(142,772	)
Other—net	(3,327		)	624
Total deferred income tax liabilities	(145,238		)	(142,148		)
Net deferred income tax assets	$	245,519		$	191,389

The deferred tax asset from tax loss carryforwards of $287.9 million represents approximately $1.10 billion of net operating loss carryforwards, $496.6 million of which are subject to expiration beginning in 2015. The remainder has an indefinite carryforward period. The deferred tax asset from foreign tax credit carryforwards of $3.2 million is subject to expiration beginning in 2019. The valuation allowance decreased by $64.0 million during 2014, primarily due to the expiration of net operating loss carryforwards against which a valuation allowance had been maintained, as well as the impact of currency translation adjustments, partially offset by 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.

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



	2014			2013		2012
Pretax income (loss):
United States	$	544,851		$	881,204	$	1,027,547
Foreign	(276,716		)	181,601		(762,124		)
Income from continuing operations before income taxes	$	268,135		$	1,062,805	$	265,423

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



	2014			2013		2012
Current tax expense:
Federal	$	117,316		$	192,875	$	240,230
State	36,136			36,818		43,661
Foreign	28,701			21,322		30,231
Deferred tax expense (benefit):
Federal	(52,182		)	72,721		77,824
State	(8,693		)	5,551		5,837
Foreign	12,331			26,514		28,487
Total income tax expense	$	133,609		$	355,801	$	426,270

See Note D - Divestitures for the losses from discontinued operations before income taxes and related income taxes reported in 2013 and 2012. 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:



	2014		2013		2012
Federal statutory rate	35.0	%	35.0	%	35.0	%
State effective rate, net of federal benefit	(1.6	)	2.3		12.1
Effect of foreign taxes	(22.3	)	(9.9	)	(11.3	)
Tax credits	(1.5	)	(0.4	)	(0.8	)
Changes in uncertain tax positions	(13.7	)	2.4		8.0
Goodwill impairment	44.1		—		82.5
Change in valuation allowance	12.5		3.8		37.1
Other	(2.7	)	0.3		(2.0	)
Effective tax rate	49.8	%	33.5	%	160.6	%

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 2014 and 2012 effective tax rates were unfavorably impacted by the goodwill impairment charges recorded in 2014 and 2012 (see Note C - Goodwill and Long-Lived Assets). The 2014 effective tax rate was favorably impacted by changes in uncertain tax positions. 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 $203.6 million, $265.9 million and $402.9 million during 2014, 2013 and 2012, respectively.

During 2014, the Company repatriated $127.3 million of cash held by a foreign subsidiary, and as a result recorded income tax expense of $11.2 million in 2014 related to the net tax cost in the U.S. stemming from the repatriation. As of January 31, 2015, the Company had $835 million of undistributed earnings. It is the Company’s intention to indefinitely reinvest the majority of the undistributed earnings outside of the U.S., and for jurisdictions not deemed indefinitely reinvested there would be no incremental tax due upon remittance. Accordingly, deferred income taxes have not been provided for these funds. 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 January 31, 2015, the Company had $216.0 million of gross unrecognized tax benefits, of which $207.6 million, if recognized, would affect the Company's tax rate. 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. The Company does not reasonably expect any material changes to the estimated amount of liability associated with its uncertain tax positions through fiscal 2015.

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



	2014			2013			2012
Balance at beginning of fiscal year	$	280,959		$	254,724		$	250,397
Additions for tax positions related to current year	21,695			28,390			39,989
Additions for tax positions of prior years	36,522			4,350			11,058
Reductions for tax positions of prior years	(87,995		)	—			—
Reduction for statute of limitations expiration	(17,236		)	(6,240		)	(30,116		)
Settlements	(17,984		)	(265		)	(16,604		)
Balance at end of fiscal year	$	215,961		$	280,959		$	254,724

The decline in the liability for unrecognized tax benefits during 2014 reflects, in part, a $69.1 million net reduction in the liability for discrete items, partially offset by a net increase to the reserve related to current year activity that impacted the Company's income tax rate. The primary driver of this net reduction was the resolution of federal and foreign audits. The federal audit primarily pertained to the utilization of certain net operating loss carryforwards that the Company acquired by virtue of its acquisition of Corporate Express.

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 2008. 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 $2.3 million, $9.1 million and $7.2 million in 2014, 2013 and 2012, respectively. The Company had $49.0 million and $46.7 million accrued for gross interest and penalties as of January 31, 2015 and February 1, 2014, respectively.