Income Taxes

Income tax expense (benefit) is summarized as follows (in thousands):



	Year Ended			Year Ended			Year Ended
	Jan 31, 2015			Feb 1, 2014			Feb 2, 2013
Federal:
Current	$	37,802		$	61,239		$	42,365
Deferred	(8,566		)	(20,294		)	10,943
State:
Current	6,242			6,202			5,853
Deferred	(3,262		)	(1,627		)	1,494
Foreign:
Current	9,756			25,611			30,775
Deferred	3,852			4,117			7,698
Total	$	45,824		$	75,248		$	99,128

Except where required by U.S. tax law, no provision was made for U.S. income taxes on the undistributed earnings of the foreign subsidiaries as the Company intends to utilize those earnings in the foreign operations for an indefinite period of time or repatriate such earnings only when tax-effective to do so. That portion of accumulated undistributed earnings of foreign subsidiaries as of January 31, 2015 and February 1, 2014 was approximately $772 million and $747 million, respectively.

Actual income tax expense differs from expected income tax expense obtained by applying the statutory federal income tax rate to earnings before income taxes as follows (in thousands):



	Year Ended			Year Ended			Year Ended
	Jan 31, 2015			Feb 1, 2014			Feb 2, 2013
Computed “expected” tax expense	$	50,053		$	81,536		$	98,215
State taxes, net of federal benefit	1,937			2,974			4,776
Incremental foreign taxes less than federal statutory tax rate	(2,603		)	(10,107		)	(13,307		)
Net tax settlements	—			—			12,832
Unrecognized tax benefit	471			6,856			147
Prior year tax adjustments	(2,955		)	(3,489		)	(2,300		)
Other	(1,079		)	(2,522		)	(1,235		)
Total	$	45,824		$	75,248		$	99,128

Total income tax expense (benefit) was allocated as follows (in thousands):



	Year Ended			Year Ended		Year Ended
	Jan 31, 2015			Feb 1, 2014		Feb 2, 2013
Operations	$	45,824		$	75,248	$	99,128
Stockholders’ equity	(660		)	3,673		3,703
Total income taxes	$	45,164		$	78,921	$	102,831

The tax effects of the components of other comprehensive income (loss) were allocated as follows (in thousands):



	Year Ended			Year Ended			Year Ended
	Jan 31, 2015			Feb 1, 2014			Feb 2, 2013
Derivative financial instruments designated as cash flow hedges	$	721		$	237		$	(1,056	)
Marketable securities	(61		)	(4		)	85
Defined benefit plans	(2,335		)	2,963			2,855
Total income tax expense (benefit)	$	(1,675	)	$	3,196		$	1,884

Total earnings before income tax expense and noncontrolling interests were comprised of the following (in thousands):



	Year Ended		Year Ended		Year Ended
	Jan 31, 2015		Feb 1, 2014		Feb 2, 2013
Domestic operations	$	98,036	$	140,153	$	169,755
Foreign operations	44,972		92,806		110,859
Earnings before income tax expense and noncontrolling interests	$	143,008	$	232,959	$	280,614

The tax effects of temporary differences that give rise to significant portions of current and non-current deferred tax assets and deferred tax liabilities as of January 31, 2015 and February 1, 2014 are presented below (in thousands):



	Jan 31, 2015			Feb 1, 2014
Deferred tax assets:
Defined benefit plans	$	23,901		$	21,716
Deferred income	15,953			11,261
Rent expense	12,672			14,986
Deferred compensation	12,416			10,692
Lease incentives	6,179			8,180
Net operating losses	6,122			2,133
Bad debt reserve	5,175			9,526
Uniform capitalization	1,927			2,162
Excess of book over tax depreciation/amortization	1,667			—
Accrued bonus	1,342			2,954
Other	15,453			13,111
Total deferred tax assets	102,807			96,721
Deferred tax liabilities:
Goodwill amortization	(3,627		)	(3,693		)
Excess of tax over book depreciation/amortization	—			(9,310		)
Other	(3,872		)	(492		)
Valuation allowance	(7,501		)	(3,853		)
Net deferred tax assets	$	87,807		$	79,373

Included above as of January 31, 2015 and February 1, 2014, were $19.1 million and $24.4 million for current deferred tax assets, respectively, and $68.7 million and $55.0 million for non-current deferred tax assets, respectively. Based on the historical earnings of the Company and projections of future taxable earnings, management believes it is more likely than not that the results of operations will not generate sufficient taxable earnings to realize net deferred tax assets. Therefore, the Company has recorded a valuation allowance of $7.5 million, which is an increase of $3.6 million from the prior year.

As of January 31, 2015, the Company’s U.S. and certain retail operations in Asia, Europe and Brazil had net operating loss carryforwards of $40.1 million and capital loss carryforwards of $0.2 million. These are comprised of $7.1 million of operating loss carryforwards that have an unlimited carryforward life, $10.7 million of foreign operating loss carryforwards that expire between fiscal 2016 and fiscal 2024, $22.3 million of state operating loss carryforwards that expire between fiscal 2016 and fiscal 2035 and $0.2 million of U.S. capital loss carryforwards that expire in fiscal 2019. Based on the historical earnings of these operations, management believes that it is more likely than not that some of the operations will not generate sufficient earnings or capital gains to utilize all of the net operating loss and the capital loss. As of January 31, 2015 and February 1, 2014, the Company had a valuation allowance of $5.4 million and $0.7 million, respectively, related to its net operating loss carryforwards.

The Company accrues an amount for its estimate of additional income tax liability which the Company, more likely than not, could incur as a result of the ultimate resolution of income tax audits (“uncertain tax positions”). The Company reviews and updates the estimates used in the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, upon completion of tax audits, upon expiration of statutes of limitation, or upon occurrence of other events.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefit (excluding interest and penalties) is as follows (in thousands):



	Year Ended			Year Ended			Year Ended
	Jan 31, 2015			Feb 1, 2014			Feb 2, 2013
Beginning balance	$	10,900		$	4,527		$	16,045
Additions:
Tax positions related to the prior year	4,224			—			—
Tax positions related to the current year	1,722			7,501			—
Reductions:
Tax positions related to the prior year	(55		)	(1,128		)	(568		)
Tax positions related to the current year	(91		)	—			—
Settlements	(599		)	—			(10,950		)
Expiration of statutes of limitation	(2,461		)	—			—
Ending balance	$	13,640		$	10,900		$	4,527

The amount of unrecognized tax benefit as of January 31, 2015 includes $12.6 million (net of federal benefit on state issues) which, if ultimately recognized, may reduce our future annual effective tax rate. As of January 31, 2015 and February 1, 2014, the Company had $14.4 million and $11.4 million, respectively, of aggregate accruals for uncertain tax positions, including penalties and interest.

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company included interest and penalties related to uncertain tax positions of $0.3 million in net income tax expense for fiscal 2015. There were minimal interest and penalties related to uncertain tax positions included in net income tax expense for fiscal 2014. Net income tax expense for fiscal 2013 included a benefit from interest and penalties related to uncertain tax positions of $0.9 million. Total interest and penalties related to uncertain tax positions was $0.7 million and $0.5 million for the years ended January 31, 2015 and February 1, 2014, respectively.

The Company and its subsidiaries are subject to U.S. federal and foreign income tax as well as income tax of multiple state and foreign local jurisdictions. From time-to-time, the Company is subject to routine income tax audits on various tax matters around the world in the ordinary course of business. Although the Company has substantially concluded all U.S. federal, foreign, state and foreign local income tax matters for years through fiscal 2009, as of January 31, 2015, several income tax audits were underway in multiple jurisdictions for various periods after fiscal 2009. The Company does not believe that the resolution of open matters will have a material effect on the Company’s financial position or liquidity.

Italian Tax Settlement

In January 2013, to avoid a potentially long and costly litigation process, the Company reached an agreement with the Italian tax authority regarding an ongoing audit of one of the Company’s Italian subsidiaries. The agreement covered fiscal years 2008 through 2013. As a result of the agreement during the fourth quarter of fiscal 2013, the Company recorded a settlement charge of $12.8 million (including penalty and interest and net of related offsets in other tax jurisdictions) in excess of prior uncertain tax position reserves of $11.7 million. The settlement amount was payable to the Italian tax authority in quarterly installments through fiscal 2015.

The Company was advised by its Italian counsel that tax audits like this one in Italy involving proposed income adjustments greater than €2 million are automatically referred for review by a public prosecutor who may seek to pursue charges or close the matter, and that resulting criminal charges, if any, would be instituted against individuals rather than against the affected companies under Italian law. Consistent with this process, a review proceeding by a prosecutor in Italy was initiated with respect to one current and two former members of the Guess European management team and the Company’s former President (as the signing officer for certain Italian tax returns covering the relevant periods). In July 2013, the matter was closed based on the prosecutor’s recommendation.