NOTE 11 — INCOME AND OTHER TAXES

The provision for income taxes consists of the following:



	Fiscal Year Ended
	February 1, 2013			February 3, 2012			January 28, 2011
	(in millions)
Current:
Federal	$	630		$	375		$	597
State/Local	76			81			66
Foreign	191			273			97
Current	897			729			760
Deferred:
Federal	(297		)	62			(95		)
State/Local	(23		)	(12		)	9
Foreign	(108		)	(31		)	41
Deferred	(428		)	19			(45		)
Provision for income taxes	$	469		$	748		$	715

Income before provision for income taxes consists of the following:



	Fiscal Year Ended
	February 1, 2013		February 3, 2012		January 28, 2011
	(in millions)
Domestic	$	24	$	365	$	532
Foreign	2,817		3,875		2,818
Income before income taxes	$	2,841	$	4,240	$	3,350

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 $52 million and $44 million for Fiscal 2013 and Fiscal 2012, respectively, related to state income tax credit carryforwards. Dell has provided a valuation allowance of $98 million and $29 million related to net operating losses for Fiscal 2013 and Fiscal 2012, respectively. Additionally, for Fiscal 2013, a $13 million valuation allowance has been provided against other deferred tax assets compared to no valuation allowance for Fiscal 2012. 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 1, 2013			February 3, 2012
	(in millions)
Deferred tax assets:
Deferred revenue	$	716		$	486
Warranty provisions	414			226
Provisions for product returns and doubtful accounts	94			85
Credit carryforwards	95			61
Loss carryforwards	339			271
Stock-based and deferred compensation	189			183
Operating and compensation related accruals	99			140
Capitalized intangible assets	52			51
Other	65			97
Deferred tax assets	2,063			1,600
Valuation allowance	(163		)	(73		)
Deferred tax assets, net of valuation allowance	1,900			1,527
Deferred tax liabilities:
Leasing and financing	(258		)	(220		)
Property and equipment	(215		)	(136		)
Acquired intangibles	(1,091		)	(667		)
Other	(23		)	(59		)
Deferred tax liabilities	(1,587		)	(1,082		)
Net deferred tax assets	$	313		$	445
Current portion	$	850		$	682
Non-current portion	(537		)	(237		)
Net deferred tax assets	$	313		$	445

The current portion of net deferred tax assets is included in other current assets and other current liabilities in the Consolidated Statements of Financial Position as of February 1, 2013, and February 3, 2012. The non-current portion of net deferred tax assets is included in other non-current assets and other non-current liabilities in the Consolidated Statements of Financial Position as of February 1, 2013, and February 3, 2012, respectively.

During Fiscal 2013 and Fiscal 2012, Dell recorded $86 million and $124 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 2013 and Fiscal 2012, Dell recorded $5 million and $10 million, respectively, to additional paid in capital related to the utilization of acquired net operating losses as a result of employee stock option activity. These amounts are reflected in the 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 2014.

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 $19.0 billion arose primarily from undistributed book earnings, which Dell intends to reinvest indefinitely. The basis differences could be reversed 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 $6.2 billion would be due upon reversal of this excess book basis as of February 1, 2013.

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 2022. 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 $410 million ($.23 per share) in Fiscal 2013, $474 million ($.26 per share) in Fiscal 2012, and $321 million ($.17 per share) in Fiscal 2011.

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



	Fiscal Year Ended
	February 1, 2013		February 3, 2012		January 28, 2011
U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
Foreign income taxed at different rates	(16.1	)	(18.7	)	(14.7	)
State income taxes, net of federal tax benefit	0.9		0.8		1.4
Vendor and other settlements	(4.3	)	(0.5	)	1.0
Other	1.0		1.0		(1.4	)
Total	16.5	%	17.6	%	21.3	%

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



	Total
	(in millions)
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
Increases related to tax positions of the current year	219
Increases related to tax positions of prior years	107
Reductions for tax positions of prior years	(44		)
Lapse of statute of limitations	(19		)
Audit settlements	(11		)
Balance at February 1, 2013	$	2,446

Dell recorded net unrecognized tax benefits of $2.9 billion and $2.6 billion, which are included in other non-current liabilities in its Consolidated Statements of Financial Position, as of February 1, 2013, and February 3, 2012, respectively. The unrecognized tax benefits in the table above do not include accrued interest and penalties. Dell had accrued interest and penalties of $767 million, $664 million, and $552 million as of February 1, 2013, February 3, 2012, and January 28, 2011, 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 $305 million, $295 million, and $242 million as of February 1, 2013, February 3, 2012, and January 28, 2011, respectively. Net unrecognized tax benefits, if recognized, would favorably affect Dell's effective tax rate. Dell does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next 12 months.

Interest and penalties related to income tax liabilities are included in income tax expense. Dell recorded $104 million, $112 million, and $45 million related to interest and penalties, which were included in income tax expense for Fiscal 2013, Fiscal 2012, and Fiscal 2011, 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 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.

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 believes that a material loss in these matters is not probable and it is not reasonably possible that a material loss exceeding amounts already accrued has been incurred. 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.