Note K. Income Taxes

The 2017 Tax Act made broad and complex changes to the U.S. tax code which had a significant impact on our 2017 tax expense, including reducing the U.S. federal corporate tax rate from 35% to 21%, expanded rules regarding expensing of fixed assets, and required one-time transition tax on certain undistributed earnings of foreign subsidiaries. Other provisions that are not yet effective but may impact income taxes in future years include: an exemption from U.S. tax on dividends of future foreign earnings, expanded limitations on executive compensation, and a minimum tax on certain foreign earnings in excess of 10% of the foreign subsidiaries tangible assets (i.e. global intangible low-taxed income or “GILTI”). Because of the complexity of the new provisions, the Company is continuing to evaluate how the provisions will be accounted under GAAP. We do not expect these provisions to have a significant impact on the Company when effective.

In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118, which allows a measurement period, not to exceed one year, to finalize the accounting for the income tax impacts of the 2017 Tax Act. To the extent our accounting for certain income tax effects of the 2017 Tax Act is incomplete but we are able to determine a reasonable estimate, we recorded a provisional estimate in the financial statements. The provisional tax benefit of the 2017 Tax Act is based on currently available information and interpretations, which are continuing to evolve. We will continue to analyze additional information and guidance related to the 2017 Tax Act as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. The final impacts may differ from the recorded amounts as of February 3, 2018, and we will continue to refine such amounts within the measurement period provided by Staff Accounting Bulletin No. 118. We expect to complete our analysis no later than the fourth quarter of fiscal 2019.

For financial reporting purposes, components of income before income taxes are as follows:


	Fiscal Year Ended
In thousands	February 3, 2018			January 28, 2017		January 30, 2016
		(53 weeks	)
United States	$	3,255,057		$	3,196,370	$	3,102,304
Foreign		601,531			526,673		555,996
Income before provision for income taxes	$	3,856,588		$	3,723,043	$	3,658,300

The provision for income taxes includes the following:


	Fiscal Year Ended
In thousands	February 3, 2018			January 28, 2017			January 30, 2016
		(53 weeks	)
Current:
Federal	$	1,063,141		$	1,068,778		$	992,094
State		160,650			213,505			208,357
Foreign		161,974			148,367			149,408
Deferred:
Federal		(164,523	)		(3,107	)		34,620
State		27,595			(10,583	)		(9,979	)
Foreign		(197	)		7,849			6,142
Provision for income taxes	$	1,248,640		$	1,424,809		$	1,380,642

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


	Fiscal Year Ended
In thousands	February 3, 2018			January 28, 2017
Deferred tax assets:
Net operating loss carryforward	$	40,088		$	27,396
Reserves for lease obligations		3,637			5,107
Pension, stock compensation, postretirement and employee benefits		232,887			412,391
Leases		42,999			57,223
Accruals and reserves		51,281			67,662
Other		25,599			48,463
Total gross deferred tax assets	$	396,491		$	618,242
Valuation allowance		(42,332	)		(29,273	)
Net deferred tax asset	$	354,159		$	588,969
Deferred tax liabilities:
Property, plant and equipment	$	437,621		$	569,377
Capitalized inventory		45,125			51,077
Tradename/intangibles		12,628			51,976
Undistributed foreign earnings		65,013			213,948
Other		20,271			10,398
Total deferred tax liabilities	$	580,658		$	896,776
Net deferred tax (liability)	$	(226,499	)	$	(307,807	)
Non-current asset	$	6,558		$	6,193
Non-current liability		(233,057	)		(314,000	)
Total	$	(226,499	)	$	(307,807	)

TJX has provided for all applicable state and foreign withholding taxes on all undistributed earnings of its foreign subsidiaries in Canada, Puerto Rico, Italy, India, Hong Kong and Vietnam through February 3, 2018. We have not provided for state and foreign withholding taxes on the approximately $1 billion of undistributed earnings related to all other foreign subsidiaries as we have provisionally asserted that these earnings are indefinitely reinvested in the business. The net amount of unrecognized state and foreign withholding tax liabilities related to the undistributed earnings is approximately $31 million.

As of February 3, 2018 and January 28, 2017, for state income tax purposes, TJX had net operating loss carryforwards of $113.9 million and $99.2 million respectively, which expire, if unused, in the years 2019 through 2037. TJX has analyzed the realization of the state net operating loss carryforwards on an individual state basis. For those states where the Company has determined that it is more likely than not that the state net operating loss carryforwards will not be realized, a valuation allowance of $8.9 million has been provided for the deferred tax asset as of February 3, 2018 and $6.8 million as of January 28, 2017.

As of February 3, 2018 and January 28, 2017, the Company had available for foreign income tax purposes (related to Australia, Austria and the Netherlands) net operating loss carryforwards of $111 million and $75 million respectively, of which $13.6 million will expire, if unused, in fiscal years 2025 through 2027. The remaining loss carryforwards do not expire. For the deferred tax assets associated with the net operating loss carryforwards for which management has determined it is more likely than not that the deferred tax assets will not be realized, TJX had valuation allowances recorded of approximately $33.4 million as of February 3, 2018, and approximately $22.5 million as of January 28, 2017.

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 3, 2018			January 28, 2017			January 30, 2016
	(53 weeks)
U.S. federal statutory income tax rate		33.7	%		35.0	%		35.0	%
Effective state income tax rate		3.6			3.5			3.5
Impact of foreign operations		(0.1	)		(0.2	)		(0.7	)
Excess share-based compensation		(1.3	)		—			—
Impact of 2017 Tax Act		(2.3	)		—			—
All other		(1.2	)		—			(0.1	)
Worldwide effective income tax rate		32.4	%		38.3	%		37.7	%

TJX’s U.S. federal statutory rate of 33.7% is a blended rate of the year due to the enactment of the 2017 Tax Act. TJX’s effective income tax rate decreased for fiscal 2018 as compared to fiscal 2017. The decrease in the effective income tax rate was primarily due to the favorable effect of the 2017 Tax Act, excess tax benefit from share-based compensation attributable to the adoption of ASU 2016-09, and the jurisdictional mix of income.

We have reasonably estimated the effects of the 2017 Tax Act and recorded a provisional benefit of approximately $88 million in our financial statements as of February 3, 2018. This amount consists of a net benefit of $281 million for the remeasurement of deferred taxes as of December 22, 2017 due to the corporate tax rate reduction and the reversal of all previous deferred U.S. tax liabilities, reduced for the applicable state and foreign withholding taxes, on undistributed earnings, reduced by a net expense of $193 million for the transition tax of which, $16 million is expected to be paid during fiscal 2019.

TJX had net unrecognized tax benefits (net of federal benefit on state issues) of $57.3 million as of February 3, 2018, $38.5 million as of January 28, 2017 and $34.1 million as of January 30, 2016.

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


	Fiscal Year Ended
In thousands	February 3, 2018			January 28, 2017			January 30, 2016
Balance at beginning of year	$	49,092		$	43,326		$	55,619
Additions for uncertain tax positions taken in current year		6,504			7,018			2,248
Additions for uncertain tax positions taken in prior years		7,990			327			11,707
Reductions for uncertain tax positions taken in prior years		(587	)		(334	)		(23,874	)
Reductions resulting from lapse of statute of limitations		(1,295	)		(1,245	)		(389	)
Settlements with tax authorities		—			—			(1,985	)
Balance at end of year	$	61,704		$	49,092		$	43,326

Included in the gross amount of unrecognized tax benefits are items that will impact future effective tax rates upon recognition. These items amounted to $55.8 million as of February 3, 2018, $43.8 million as of January 28, 2017 and $39.0 million as of January 30, 2016.

TJX is subject to U.S. federal income tax as well as income tax in multiple state, local and foreign jurisdictions. In the U.S., fiscal years through 2010 are no longer subject to examination. In Canada, fiscal years through 2008 are no longer subject to examination. In all other jurisdictions, fiscal years through 2009 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 $1.9 million for the year ended February 3, 2018, $1.4 million for the year ended January 28, 2017 and $1.6 million for the year ended January 30, 2016. The accrued amounts for interest and penalties are $11.9 million as of February 3, 2018, $8.0 million as of January 28, 2017 and $7.0 million as of January 30, 2016.

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 3, 2018. During the next twelve months, it is reasonably possible that state tax audit resolutions may reduce unrecognized tax benefits by $0 to $21 million, which would reduce the provision for taxes on earnings.