Note K. Income Taxes

The provision for income taxes includes the following:


	Fiscal Year Ended
In thousands	February 2, 2013			January 28, 2012			January 29, 2011
	(53 weeks)
Current:
Federal	$	842,149		$	554,847		$	510,629
State		162,200			126,237			113,573
Foreign		153,083			99,463			105,489
Deferred:
Federal		22,394			131,527			91,568
State		1,583			6,202			1,731
Foreign		(10,745	)		(2,952	)		1,572
Provision for income taxes	$	1,170,664		$	915,324		$	824,562

Income from continuing operations before income taxes includes foreign pre-tax income of $559.7 million in fiscal 2013, $319.4 million in fiscal 2012 and $354.2 million in fiscal 2011.

TJX had net deferred tax (liabilities) assets as follows:


	Fiscal Year Ended
In thousands	February 2, 2013			January 28, 2012
Deferred tax assets:
Foreign tax credit carryforward	$	—		$	24,861
Reserve for former operations		19,565			7,363
Pension, stock compensation, postretirement and employee benefits		313,597			265,397
Leases		40,440			39,778
Computer Intrusion reserve		5,661			5,699
Other		64,393			65,970
Total deferred tax assets	$	443,656		$	409,068
Deferred tax liabilities:
Property, plant and equipment	$	360,282		$	360,629
Capitalized inventory		47,903			46,864
Tradename		43,520			42,873
Undistributed foreign earnings		233,002			201,012
Other		12,216			14,322
Total deferred tax liabilities	$	696,923		$	665,700
Net deferred tax (liability)	$	(253,267	)	$	(256,632	)

The fiscal 2013 net deferred tax liability is presented on the balance sheet as a current asset of $96.2 million and a non-current liability of $349.5 million. The fiscal 2012 net deferred tax liability is presented on the balance sheet as a current asset of $105.9 million and a non-current liability of $362.5 million. TJX has provided for deferred U.S. taxes on all undistributed earnings from its Winners Canadian subsidiary, its Puerto Rico subsidiary and its subsidiaries in Italy, India, Hong Kong, and Australia through February 2, 2013. The net deferred tax liability summarized above includes deferred taxes relating to temporary differences at our foreign operations and amounted to a $5.2 million net liability as of February 2, 2013 and $17.0 million net liability as of January 28, 2012.

No income taxes have been provided on the approximately $385.4 million of undistributed earnings of foreign subsidiaries as of February 2, 2013, because such earnings are considered to be indefinitely reinvested in the business. A determination of the amount of unrecognized deferred tax liability related to the undistributed earnings is not practicable because of the complexities associated with the hypothetical calculations.

TJX established valuation allowances against certain deferred tax assets, primarily related to state tax net operating losses from non operational subsidiaries, which may not be realized in future years. The amount of the valuation allowances was $4.6 million as of February 2, 2013 and $5.9 million as of January 28, 2012.

TJX’s worldwide effective income tax rate was 38.0% for fiscal 2013, 38.0% for fiscal 2012 and 38.1% for fiscal 2011. The difference between the U.S. federal statutory income tax rate and TJX’s worldwide effective income tax rate is reconciled below:


	Fiscal Year Ended
	February 2, 2013			January 28, 2012			January 29, 2011
	(53 weeks)
U.S. federal statutory income tax rate		35.0	%		35.0	%		35.0	%
Effective state income tax rate		4.2			4.1			4.1
Impact of foreign operations		(0.9	)		(0.6	)		(0.5	)
All Other		(0.3	)		(0.5	)		(0.5	)
Worldwide effective income tax rate		38.0	%		38.0	%		38.1	%

TJX’s effective rate remained constant for fiscal 2013 as compared to fiscal 2012. The fiscal 2013 effective tax rate benefitted from an increase in foreign earnings, which are taxed at lower rates, but this benefit was offset by the absence of the benefit in fiscal 2012 due to a net reduction in federal and state tax reserves. The decrease in TJX’s effective rate for fiscal 2012 as compared to fiscal 2011 is primarily attributed to the favorable resolution of U.S. Federal tax audits partially offset by an increase in the U.S. federal and state tax reserves.

TJX had net unrecognized tax benefits of $125.3 million as of February 2, 2013, $116.6 million as of January 28, 2012 and $122.9 million as of January 29, 2011.

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


	Fiscal Year Ended
In thousands	February 2, 2013			January 28, 2012			January 29, 2011
Balance at beginning of year	$	144,505		$	123,094		$	191,741
Additions for uncertain tax positions taken in current year		1,949			1,131			3,968
Additions for uncertain tax positions taken in prior years		3,009			63,463			23,730
Reductions for uncertain tax positions taken in prior years		—			(40,558	)		(92,483	)
Reductions resulting from lapse of statute of limitations		(129	)		—			(1,123	)
Settlements with tax authorities		(557	)		(2,625	)		(2,739	)
Balance at end of year	$	148,777		$	144,505		$	123,094

Included in the gross amount of unrecognized tax benefits are items that will not impact future effective tax rates upon recognition. These items amounted to $19.8 million as of February 2, 2013, $20.0 million as of January 28, 2012 and $11.0 million as of January 29, 2011.

TJX is subject to U.S. federal income tax as well as income tax in multiple state, local and foreign jurisdictions. In nearly all jurisdictions, the tax years through fiscal 2001 are no longer subject to examination.

TJX’s accounting policy is to classify interest and penalties related to income tax matters as part of income tax expense. The amount of interest and penalties expensed was $4.7 million for the year ended February 2, 2013; $5.8 million for the year ended January 28, 2012 and $1.9 million for the year ended January 29, 2011. The accrued amounts for interest and penalties are $38.6 million as of February 2, 2013, $33.0 million as of January 28, 2012 and $34.6 million as of January 29, 2011.

Based on the final resolution of tax examinations, judicial or administrative proceedings, changes in facts or law, expirations of statute of limitations in specific jurisdictions or other resolutions of, or changes in, tax positions, it is reasonably possible that unrecognized tax benefits for certain tax positions taken on previously filed tax returns may change materially from those represented on the financial statements as of February 2, 2013. During the next twelve months, it is reasonably possible that such circumstances may occur that would have a material effect on previously unrecognized tax benefits. As a result, the total net amount of unrecognized tax benefits may decrease, which would reduce the provision for taxes on earnings by a range estimated at $1.0 million to $50 million.