NOTE 11 — INCOME AND OTHER TAXES

The provision for income taxes consists of the following:



	Fiscal Year Ended
	February 3, 2012			January 28, 2011			January 29, 2010
	(in millions)
Current:
Federal	$	375		$	597		$	491
State/Local	81			66			36
Foreign	273			97			116
Current	729			760			643
Deferred:
Federal	62			(95		)	(21		)
State/Local	(12		)	9			9
Foreign	(31		)	41			(40		)
Deferred	19			(45		)	(52		)
Provision for income taxes	$	748		$	715		$	591

Income before provision for income taxes consists of the following:



	Fiscal Year Ended
	February 3, 2012		January 28, 2011		January 29, 2010
	(in millions)
Domestic	$	365	$	532	$	182
Foreign	3,875		2,818		1,842
Income before income taxes	$	4,240	$	3,350	$	2,024

Deferred tax assets and liabilities are recorded for the estimated tax impact of temporary differences between the tax and book basis of assets and liabilities, and are recognized based on the enacted statutory tax rates for the year in which Dell expects the differences to reverse. A valuation allowance is established against a deferred tax asset when it is more likely than not that the asset or any portion thereof will not be realized. Based upon all the available evidence, including expectation of future taxable income, Dell has provided a valuation allowance of $44 million and $48 million for Fiscal 2012 and Fiscal 2011, respectively, related to state income tax credit carryforwards. Dell has provided a valuation allowance of $29 million and $20 million related to net operating losses for Fiscal 2012 and Fiscal 2011, respectively. No valuation allowance has been provided against other deferred tax assets for Fiscal 2012, compared to a $4 million valuation allowance provided against other deferred tax assets for Fiscal 2011. Dell has determined that it will be able to realize the remainder of its deferred tax assets.

The components of Dell's net deferred tax assets are as follows:



	February 3, 2012			January 28, 2011
	(in millions)
Deferred tax assets:
Deferred revenue	$	486		$	369
Warranty provisions	226			214
Provisions for product returns and doubtful accounts	85			77
Credit carryforwards	61			54
Loss carryforwards	271			268
Stock-based and deferred compensation	183			203
Operating and compensation related accruals	140			135
Capitalized intangible assets	51			55
Other	97			98
Deferred tax assets	1,600			1,473
Valuation allowance	(73		)	(72		)
Deferred tax assets, net of valuation allowance	1,527			1,401
Deferred tax liabilities:
Leasing and financing	(220		)	(49		)
Property and equipment	(136		)	(144		)
Acquired intangibles	(667		)	(511		)
Other	(59		)	(64		)
Deferred tax liabilities	(1,082		)	(768		)
Net deferred tax assets	$	445		$	633
Current portion	$	682		$	558
Non-current portion	(237		)	75
Net deferred tax assets	$	445		$	633

The current portion of net deferred tax assets is included in Other current assets in the Consolidated Statements of Financial Position as of February 3, 2012, and January 28, 2011. The non-current portion of net deferred tax assets is included in Other non-current liabilities and Other non-current assets in the Consolidated Statements of Financial Position as of February 3, 2012, and January 28, 2011, respectively.

During Fiscal 2012 and Fiscal 2011, Dell recorded $124 million and $41 million, respectively, of deferred tax assets related to net operating loss and credit carryforwards acquired during the year, all of which was offset against goodwill. During Fiscal 2012 and Fiscal 2011, $10 million and $21 million, respectively, were recorded to additional paid in capital related to the utilization of acquired net operating losses as a result of employee stock option activity, and is included in net tax shortfall from employee stock plans on the Consolidated Statements of Stockholders' Equity. Utilization of the acquired carryforwards is subject to limitations due to ownership changes that may delay the utilization of a portion of the acquired carryforwards. No additional valuation allowances have been placed on the acquired net operating loss and credit carryforwards. The carryforwards expire beginning in Fiscal 2015.

Deferred taxes have not been recorded on the excess book basis in the shares of certain foreign subsidiaries because these basis differences are not expected to reverse in the foreseeable future and are expected to be permanent in duration. The basis differences in the amount of approximately $15.9 billion arose primarily from undistributed book earnings, which Dell intends to reinvest indefinitely. The basis differences could reverse through a sale of the subsidiaries or the receipt of dividends from the subsidiaries, as well as various other events. Net of available foreign tax credits, residual income tax of approximately $5.2 billion would be due upon reversal of this excess book basis as of February 3, 2012.

A portion of Dell's operations is subject to a reduced tax rate or is free of tax under various tax holidays. Dell's significant tax holidays expire in whole or in part during Fiscal 2016 through Fiscal 2021. Many of these tax holidays and reduced tax rates may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The income tax benefits attributable to the tax status of these subsidiaries were estimated to be approximately $474 million ($.26 per share) in Fiscal 2012, $321 million ($.17 per share) in Fiscal 2011, and $149 million ($.08 per share) in Fiscal 2010.

The effective tax rate differed from the statutory U.S. federal income tax rate as follows:



	Fiscal Year Ended
	February 3, 2012		January 28, 2011		January 29, 2010
U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
Foreign income taxed at different rates	(19.2	)	(14.7	)	(7.6	)
State income taxes, net of federal tax benefit	0.8		1.4		1.4
Regulatory settlement	—		1.0		—
Other	1.0		(1.4	)	0.4
Total	17.6	%	21.3	%	29.2	%

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	Total
	(in millions)
Balance at January 30, 2009	$	1,538
Increases related to tax positions of the current year	298
Increases related to tax positions of prior years	32
Reductions for tax positions of prior years	(69		)
Lapse of statute of limitations	(3		)
Audit settlements	(3		)
Balance at January 29, 2010	1,793
Increases related to tax positions of the current year	262
Increases related to tax positions of prior years	22
Reductions for tax positions of prior years	(41		)
Lapse of statute of limitations	(32		)
Audit settlements	(21		)
Balance at January 28, 2011	1,983
Increases related to tax positions of the current year	260
Increases related to tax positions of prior years	30
Reductions for tax positions of prior years	(43		)
Lapse of statute of limitations	(32		)
Audit settlements	(4		)
Balance at February 3, 2012	$	2,194

Dell recorded net unrecognized tax benefits of $2.6 billion and $2.3 billion, which are included in Other non-current liabilities in its Consolidated Statements of Financial Position, as of February 3, 2012, and January 28, 2011, respectively. The unrecognized tax benefits in the table above do not include accrued interest and penalties. Dell had accrued interest and penalties of $664 million, $552 million, and $507 million as of February 3, 2012, January 28, 2011, and January 29, 2010, respectively. These interest and penalties are offset by tax benefits from transfer pricing, interest deductions, and state income tax, which are also not included in the table above. These benefits were $295 million, $242 million, and $209 million as of February 3, 2012, January 28, 2011, and January 29, 2010, respectively. Net unrecognized tax benefits, if recognized, would favorably affect Dell's effective tax rate.

Interest and penalties related to income tax liabilities are included in income tax expense. Dell recorded $112 million, $45 million, and $107 million related to interest and penalties, which were included in income tax expense for Fiscal 2012, Fiscal 2011, and Fiscal 2010, respectively.

Dell is currently under income tax audits in various jurisdictions, including the United States. The tax periods open to examination by the major taxing jurisdictions to which Dell is subject include fiscal years 1999 through 2011. As a result of these audits, Dell maintains ongoing discussions and negotiations relating to tax matters with the taxing authorities in these various jurisdictions. Dell believes that it has provided adequate reserves related to all matters contained in tax periods open to examination.

Dell's U.S. federal income tax returns for fiscal years 2007 through 2009 are currently under examination by the Internal Revenue Service (“IRS”). The IRS issued a Revenue Agent's Report (“RAR”) for fiscal years 2004 through 2006 proposing certain assessments primarily related to transfer pricing matters. Dell disagrees with certain of the proposed assessments and has contested them through the IRS administrative appeals procedures. The IRS has remanded the audit for tax years 2004 through 2006 back to examination for further review. Should Dell experience an unfavorable outcome in the IRS matter, such an outcome could have a material impact on its results of operations, financial position, and cash flows. Although the timing of income tax audit resolutions and negotiations with taxing authorities is highly uncertain, Dell does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next 12 months.

Dell takes certain non-income tax positions in the jurisdictions in which it operates and has received certain non-income tax assessments from various jurisdictions. Dell has recently reached agreement with a state government in Brazil regarding the proper application of transactional taxes to warranties related to the sale of computers. Under the consensus, Dell has agreed to apply certain tax incentives in order to offset potential tax liabilities. Reaching this agreement did not have a material impact to its Consolidated Financial Statements.

Dell believes its positions in these non-income tax litigation matters are supportable, that a liability is not probable, and that it will ultimately prevail. In the normal course of business, Dell's positions and conclusions related to its non-income taxes could be challenged and assessments may be made. To the extent new information is obtained and Dell's views on its positions, probable outcomes of assessments, or litigation change, changes in estimates to Dell's accrued liabilities would be recorded in the period in which such determination is made.