Note P — Income Taxes

The provision for income taxes was computed based on the following amounts of income before income taxes:

		2013				2012				2011
		In thousands
Domestic		$	735,177			$	663,380			$	582,198
Foreign			827,313				758,495				582,545
Income before income taxes		$	1,562,490			$	1,421,875			$	1,164,743

The provision for income taxes consisted of:

		2013				2012				2011
		In thousands
Current:
Federal		$	238,816			$	231,282			$	193,433
Foreign			103,752				100,635				57,738
State			22,173				24,617				34,046
			364,741				356,534				285,217
Deferred:
Federal and state			(15,265	)			(13,999	)			(7,955	)
Foreign			2,895				(6,798	)			(2,912	)
Income taxes		$	352,371			$	335,737			$	274,350

The differences between income taxes computed by applying the statutory federal income tax rate and income tax expense in the consolidated financial statements are as follows:

		2013				2012				2011
		In thousands
Tax at federal statutory rate		$	546,872			$	497,656			$	407,660
State income taxes, net of federal tax benefit			19,653				24,304				23,147
Foreign rate differences			(187,513	)			(165,318	)			(144,327	)
Change in valuation allowance			(3,422	)			(33,060	)			(12,126	)
Tax credits			(16,742	)			—				(8,454	)
Other			(6,477	)			12,155				8,450
Income taxes		$	352,371			$	335,737			$	274,350

Foreign rate differences include tax benefits of $6.9 million, $14.8 million and $1.8 million in 2013, 2012 and 2011, respectively, from the favorable audit outcomes on certain tax matters and from expiration of statutes of limitations.

VF has been granted a lower effective income tax rate on taxable earnings for years 2010 through 2014 in a foreign jurisdiction based on investment and employment level requirements. This lower rate, when compared with the country’s statutory rate, resulted in an income tax reduction of $10.4 million ($0.02 per diluted share) in 2013, $6.3 million ($0.01 per diluted share) in 2012, and $6.2 million ($0.01 per diluted share) in 2011. In addition, VF has been granted a lower effective income tax rate on taxable earnings in another foreign jurisdiction for the years 2010 through 2019. This lower rate, when compared with the country’s statutory rate, resulted in an income tax reduction of $3.3 million ($0.01 per diluted share) in 2013, $8.1 million ($0.02 per diluted share) in 2012, and $5.5 million ($0.01 per diluted share) in 2011.

Deferred income tax assets and liabilities consisted of the following:

		2013				2012
		In thousands
Deferred income tax assets:
Inventories		$	29,325			$	13,237
Employee compensation and benefits			272,910				365,412
Other accrued expenses			168,669				167,230
Operating loss carryforwards			122,895				125,436
Capital loss carryforwards			769				2,649
			594,568				673,964
Valuation allowance			(107,521	)			(99,703	)
Deferred income tax assets			487,047				574,261
Deferred income tax liabilities:
Intangible assets			761,140				775,049
Other deferred liabilities			514				2,939
Foreign currency translation			1,408				1,993
Deferred income tax liabilities			763,062				779,981
Net deferred income tax assets (liabilities)		$	(276,015	)		$	(205,720	)
Amounts included in the Consolidated Balance Sheets:
Current assets		$	169,321			$	140,515
Current liabilities (Note J)			(9,367	)			(6,601	)
Noncurrent assets (Note H)			16,537				27,170
Noncurrent liabilities (Note L)			(452,506	)			(366,804	)
		$	(276,015	)		$	(205,720	)

As of the end of 2013, VF has not provided deferred taxes on $2,532.8 million of undistributed earnings from international subsidiaries where the earnings are considered to be permanently reinvested. VF’s intent is to continue to reinvest these earnings to support the strategic priority for growth in international markets. If management decides at a later date to repatriate these funds to the U.S., VF would be required to provide taxes on these amounts based on applicable U.S. tax rates, net of foreign taxes already paid. VF has not determined the deferred tax liability associated with these undistributed earnings, as such determination is not practicable.

VF has potential tax benefits totaling $99.7 million for foreign operating loss carryforwards, of which $93.3 million have an unlimited carryforward life. In addition, there are $4.8 million of potential tax benefits for federal operating loss carryforwards that expire between 2017 and 2027, $18.4 million of benefits for state operating loss and credit carryforwards that expire between 2014 and 2029 and $0.8 million of benefits for federal capital loss carryforwards that expire in 2014. Some of the foreign and substantially all of the federal and state operating loss carryforward amounts relate to acquired companies for periods prior to their acquisition by VF. A valuation allowance has been provided where it is more likely than not that the deferred tax assets related to those operating loss carryforwards will not be realized.

Valuation allowances totaled $90.2 million for available foreign operating loss carryforwards, $10.9 million for available state operating loss and credit carryforwards, $0.8 million for federal capital loss carryforwards and $5.6 million for other foreign deferred income tax assets. During 2013, VF had a net increase in valuation allowances of $3.8 million related to foreign operating loss carryforwards and other deferred tax assets, an increase of $5.8 million related to state operating loss and credit carryforwards, a decrease of $1.9 million related to federal capital loss carryforwards, and an increase of $0.1 million related to foreign currency translation effects. Of the $7.8 million increase in valuation allowances, $3.4 million relates to decreases in valuation allowances where management believes it is more likely than not that the underlying deferred tax assets are realizable, $11.1 million relates to an increase in valuation allowances in state and foreign jurisdictions where the underlying deferred tax assets are not realizable, and $0.1 million relates to an increase for foreign currency effects.

A reconciliation of the change in the accrual for unrecognized income tax benefits is as follows:

		Unrecognized Income Tax Benefits				Accrued Interest and Penalties				Unrecognized Income Tax Benefits, Including Interest
		In thousands
Balance, December 2010		$	57,568			$	9,830			$	67,398
Additions for current year tax positions			14,862				4				14,866
Additions for prior year tax positions			12,038				6,661				18,699
Additions for prior year – Timberland acquisition			48,077				1,792				49,869
Reductions for prior year tax positions			(13,975	)			(570	)			(14,545	)
Reductions due to statute expirations			(6,748	)			(4,006	)			(10,754	)
Payments in settlement			(6,951	)			(579	)			(7,530	)
Currency translation			88				—				88
Balance, December 2011			104,959				13,132				118,091
Additions for current year tax positions			18,930				—				18,930
Additions for prior year tax positions			39,616				6,199				45,815
Reductions for prior year – Timberland acquisition			(5,707	)			151				(5,556	)
Reductions for prior year tax positions			(19,678	)			(2,314	)			(21,992	)
Reductions due to statute expirations			(2,765	)			(207	)			(2,972	)
Payments in settlement			(313	)			(140	)			(453	)
Currency translation			252				—				252
Balance, December 2012			135,294				16,821				152,115
Additions for current year tax positions			11,921				—				11,921
Additions for prior year tax positions			10,908				4,627				15,535
Reductions for prior year tax positions			(8,521	)			(2,130	)			(10,651	)
Reductions due to statute expirations			(6,527	)			(626	)			(7,153	)
Payments in settlement			(24,422	)			(1,218	)			(25,640	)
Currency translation			(139	)			—				(139	)
Balance, December 2013		$	118,514			$	17,474			$	135,988

		2013				2012
		In thousands
Amounts included in the Consolidated Balance Sheets:
Unrecognized income tax benefits, including interest		$	135,988			$	152,115
Less deferred tax benefits			26,438				34,990
Total unrecognized tax benefits		$	109,550			$	117,125

The net unrecognized tax benefits and interest of $109.6 million at the end of 2013, if recognized, would reduce the annual effective tax rate.

VF files a consolidated U.S. federal income tax return, as well as separate and combined income tax returns in numerous state and foreign jurisdictions. In the U.S., the Internal Revenue Service (“IRS”) examination for tax years 2007, 2008 and 2009 was completed in 2012. VF has appealed the results of the 2007 to 2009 examination to the IRS Appeals office. Tax years prior to 2007 have been effectively settled with the IRS. The IRS commenced its examination of VF’s 2010 and 2011 tax returns during the fourth quarter of 2013 and Timberland’s 2010 and 2011 tax years during 2012. The IRS audit of Timberland’s 2008 and 2009 tax years was settled during 2012. In addition, VF is currently subject to examination by various state and international tax authorities. Management regularly assesses the potential outcomes of both ongoing and future examinations for the current and prior years to ensure VF’s provision for income taxes is sufficient. The outcome of any one examination is not expected to have a material impact on VF’s consolidated financial statements. Management believes that some of these audits and negotiations will conclude during the next 12 months. Management also believes that it is reasonably possible that the amount of unrecognized income tax benefits may decrease by $50.2 million within the next 12 months due to settlement of audits and expiration of statutes of limitations, $42.8 million of which would reduce income tax expense.