Note O — Income Taxes

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

 

		2015				2014				2013
						In thousands
Domestic		$	745,061			$	460,561			$	735,177
Foreign			835,328				891,805				827,313
Income before income taxes		$	1,580,389			$	1,352,366			$	1,562,490

The provision for income taxes consisted of:

 

		2015				2014				2013
		In thousands
Current:
Federal		$	194,851			$	205,618			$	238,816
Foreign			112,885				138,634				103,752
State			33,972				38,673				22,173
			341,708				382,925				364,741
Deferred:
Federal and state			401				(78,362	)			(15,265	)
Foreign			6,687				298				2,895
Income taxes		$	348,796			$	304,861			$	352,371

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

 

		2015				2014				2013
		In thousands
Tax at federal statutory rate		$	553,136			$	473,328			$	546,872
State income taxes, net of federal tax benefit			16,451				25,594				19,653
Foreign rate differences			(212,287	)			(230,190	)			(187,513	)
Goodwill impairment			—				49,840				—
Change in valuation allowances			—				—				(3,422	)
Tax credits			(8,775	)			(9,033	)			(17,236	)
Other			271				(4,678	)			(5,983	)
Income taxes		$	348,796			$	304,861			$	352,371

 

Foreign rate differences include tax benefits of $28.4 million, $11.2 million and $6.9 million in 2015, 2014 and 2013, respectively, from favorable audit outcomes on certain tax matters and from expiration of statutes of limitations.

VF was granted a ruling which lowered the effective income tax rate on taxable earnings for years 2010 through 2014 under Belgium’s excess profit tax regime. This lower rate, when compared with the country’s statutory rate, resulted in an income tax reduction of $14.9 million ($0.03 per diluted share) in 2014 and $10.4 million ($0.02 per diluted share) in 2013. In February 2015, the European Union Commission (“EU”) opened a state aid investigation into Belgium’s rulings. On January 11, 2016, the EU announced its decision that these rulings were illegal and ordered that tax benefits granted under these rulings should be collected from the affected companies, including VF. If this matter is adversely resolved, the Belgian government may be required to assess, and VF may be required to pay, past taxes reflective of the disallowed alleged state aid that VF received in years 2010 through 2014. VF is currently assessing its legal options and the impact that an adverse outcome would have on the Company’s financial statements in future periods, but does not expect the impact to be material.

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 income tax reductions of $3.2 million ($.01 per diluted share) in 2015, $6.0 million ($0.01 per diluted share) in 2014 and $3.3 million ($0.01 per diluted share) in 2013.

Deferred income tax assets and liabilities consisted of the following:

 

		2015				2014
		In thousands
Deferred income tax assets:
Inventories		$	38,897			$	34,430
Employee compensation and benefits			252,307				257,187
Other accrued expenses			154,337				186,390
Operating loss carryforwards			139,634				115,259
Gross deferred income tax assets			585,175				593,266
Valuation allowances			(100,951	)			(96,802	)
Net deferred income tax assets			484,224				496,464
Deferred income tax liabilities:
Depreciation			27,756				624
Intangible assets			591,615				652,950
Other deferred tax liabilities			67,016				22,923
Deferred income tax liabilities			686,387				676,497
Net deferred income tax assets (liabilities)		$	(202,163	)		$	(180,033	)
Amounts included in the Consolidated Balance Sheets (a):
Noncurrent assets (Note G)		$	39,246			$	49,431
Noncurrent liabilities (Note K)			(241,409	)			(229,464	)
		$	(202,163	)		$	(180,033	)

 

(a)	As discussed in Note A , we have presented all deferred tax assets and liabilities as noncurrent.

 

As of the end of 2015, VF has not provided deferred taxes on $3,657.2 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 $106.0 million for foreign operating loss carryforwards, of which $103.3 million have an unlimited carryforward life. In addition, there are $3.0 million of potential tax benefits for federal operating loss carryforwards that expire between 2017 and 2026, and $30.6 million of potential tax benefits for state operating loss and credit carryforwards that expire between 2016 and 2031.

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 $83.0 million for available foreign operating loss carryforwards, $12.4 million for available state operating loss and credit carryforwards, and $5.6 million for other foreign deferred income tax assets. During 2015, VF had a net increase in valuation allowances of $3.1 million related to state operating loss and credit carryforwards, and an increase of $1.0 million related to foreign operating loss carryforwards and other foreign deferred tax assets, inclusive of 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 and Penalties
		In thousands
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
Additions for current year tax positions			12,850				—				12,850
Additions for prior year tax positions			5,252				5,033				10,285
Reductions for prior year tax positions			(12,898	)			(2,780	)			(15,678	)
Reductions due to statute expirations			(9,159	)			(647	)			(9,806	)
Payments in settlement			(657	)			(1,742	)			(2,399	)
Currency translation			(298	)			(119	)			(417	)
Balance, December 2014			113,604				17,219				130,823
Additions for current year tax positions			13,470				—				13,470
Additions for prior year tax positions			4,396				3,188				7,584
Reductions for prior year tax positions			(32,432	)			(6,350	)			(38,782	)
Reductions due to statute expirations			(11,780	)			(2,528	)			(14,308	)
Payments in settlement			(11,437	)			(2,065	)			(13,502	)
Currency translation			(144	)			(95	)			(239	)
Balance, December 2015		$	75,677			$	9,369			$	85,046

 

		2015				2014
		In thousands
Amounts included in the Consolidated Balance Sheets:
Unrecognized income tax benefits, including interest and penalties		$	85,046			$	130,823
Less deferred tax benefits			11,973				23,290
Total unrecognized tax benefits		$	73,073			$	107,533

The unrecognized tax benefits of $73.1 million at the end of 2015, 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”) examinations for tax years 2007 through 2011 were effectively settled during 2015. Additionally, tax years prior to 2007 were effectively settled with the IRS in prior years. During 2014, the IRS completed its examination of Timberland’s 2010 tax return. The examination of Timberland’s 2011 tax return is still ongoing. The IRS has proposed material adjustments to Timberland’s 2011 tax return that would significantly impact the timing of cash tax payments and assessment of interest charges. The Company has formally disagreed with the proposed adjustments and, during the third quarter of 2015, VF filed a petition to the U.S. Tax Court to begin the process of resolving this matter. 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, and has concluded that VF’s provision for income taxes is adequate. 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 $38.4 million within the next 12 months due to settlement of audits and expiration of statutes of limitations, $33.4 million of which would reduce income tax expense.