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 are as follows (in millions):



	January 30, 2016			January 31, 2015
Deferred income tax assets:
Deferred rent	$	22		$	28
Foreign tax credit carryforwards	—			3
Net operating loss carryforwards	270			288
Capital loss carryforwards	24			27
Employee benefits	106			159
Bad debts	18			20
Inventory	15			25
Insurance	34			37
Deferred revenue	11			14
Depreciation	7			50
Financing	57			26
Accrued expenses	19			15
Store closures	35			35
Acquisition Costs	20			—
Other—net	12			14
Total deferred income tax assets	650			741
Total valuation allowance	(333		)	(350		)
Net deferred income tax assets	$	317		$	391
Deferred income tax liabilities:
Intangibles	$	(124	)	$	(142	)
Other—net	(5		)	(3		)
Total deferred income tax liabilities	(129		)	(145		)
Net deferred income tax assets	$	188		$	246

The deferred tax asset from tax loss carryforwards of $270 million represents approximately $1.0 billion of net operating loss carryforwards, $421 million of which are subject to expiration beginning in 2016. The remainder has an indefinite carryforward period. The valuation allowance decreased by $17 million during 2015, 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 on current year operating losses 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 millions):



	2015		2014			2013
Pretax income (loss):
United States	$	463	$	545		$	881
Foreign	29		(277		)	182
Income from continuing operations before income taxes	$	492	$	268		$	1,063

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



	2015		2014			2013
Current tax expense:
Federal	$	54	$	117		$	193
State	3		36			37
Foreign	28		29			21
Deferred tax expense (benefit):
Federal	17		(52		)	73
State	1		(9		)	6
Foreign	10		12			26
Total income tax expense	$	113	$	133		$	356

See Note D - Sale of Businesses and Assets for the losses from discontinued operations before income taxes and related income taxes reported in 2013. 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:



	2015		2014		2013
Federal statutory rate	35.0	%	35.0	%	35.0	%
State effective rate, net of federal benefit	2.9		(1.6	)	2.3
Effect of foreign taxes	(12.9	)	(22.3	)	(9.9	)
Tax credits	(0.8	)	(1.5	)	(0.4	)
Changes in uncertain tax positions	(9.0	)	(13.7	)	2.4
Goodwill impairment	—		44.1		—
Change in valuation allowance	6.4		12.5		3.8
Other	1.4		(2.7	)	0.3
Effective tax rate	23.0	%	49.8	%	33.5	%

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 effective tax rate was unfavorably impacted by the goodwill impairment charges recorded in 2014 (see Note C - Goodwill and Long-Lived Assets). The 2015 and 2014 effective tax rates were favorably impacted by changes in uncertain tax positions.

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 $205 million, $204 million and $266 million during 2015, 2014 and 2013, respectively.

During 2014, the Company repatriated $127 million of cash held by a foreign subsidiary, and as a result recorded income tax expense of $11 million in 2014 related to the net tax cost in the U.S. stemming from the repatriation. As of January 30, 2016, the Company had $837 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 30, 2016, the Company had $136 million of gross unrecognized tax benefits, of which $127 million, if recognized, would affect the Company's tax rate. At January 31, 2015, the Company had $216 million of gross unrecognized tax benefits, of which $208 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 2016.

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



	2015			2014			2013
Balance at beginning of fiscal year	$	216		$	281		$	255
Additions for tax positions related to current year	19			22			28
Additions for tax positions of prior years	5			36			4
Reductions for tax positions of prior years	(5		)	(88		)	—
Reduction for statute of limitations expiration	(69		)	(17		)	(6		)
Settlements	(30		)	(18		)	—
Balance at end of fiscal year	$	136		$	216		$	281

The decline in the liability for unrecognized tax benefits during 2015 was primarily driven by statute of limitations expirations.

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 2011. All material state, local and foreign income tax matters for years through 2002 have been substantially concluded.

The Company recognized interest (benefits) expense and penalties related to income tax matters of $(6) million, $2 million, $9 million in 2015, 2014 and 2013, respectively, which was classified in income tax expense. The Company had $28 million and $49 million accrued for gross interest and penalties as of January 30, 2016 and January 31, 2015, respectively.