Taxes

The Company is a United Kingdom tax resident and is incorporated in the British Virgin Islands. Capri’s subsidiaries are subject to taxation in the U.S. and various other foreign jurisdictions, which are aggregated in the “Non-U.S.” information captioned below.

Income before provision for income taxes consisted of the following (in millions):



	Fiscal Years Ended
	March 30, 2019		March 31, 2018		April 1, 2017
U.S.	$	191	$	124	$	229
Non-U.S.	430		618		460
Total income before provision for income taxes	$	621	$	742	$	689

The provision for income taxes was as follows (in millions):



	Fiscal Years Ended
	March 30, 2019				March 31, 2018				April 1, 2017
Current
U.S. Federal	$	82		⁽²⁾	$	48			$	131
U.S. State	24				16				20
Non-U.S.	44				77				46
Total current	150				141				197
Deferred
U.S. Federal	(34		)	⁽²⁾	24			⁽¹⁾	(34		)
U.S. State	(4		)		1				(5		)
Non-U.S.	(33		)		(16		)		(21		)
Total deferred	(71		)		9				(60		)
Total provision for income taxes	$	79			$	150			$	137


⁽¹⁾	Includes an $18 million provision related to the U.S. Tax Act one time revaluation of deferred tax assets.


⁽²⁾	Includes a $25 million current tax detriment and equal deferred tax benefit related to the U.S. Tax Act impact to business interest disallowance provisions.

The Company’s provision for income taxes for the years ended March 30, 2019, March 31, 2018 and April 1, 2017 was different from the amount computed by applying the statutory U.K. income tax rate to the underlying income from continuing operations before income taxes and equity in net income of affiliates as a result of the following:



	Fiscal Years Ended
	March 30, 2019				March 31, 2018				April 1, 2017
Provision for income taxes at the U.K. statutory tax rate	19.0	%			19.0	%			20.0	%
State and local income taxes, net of federal benefit	0.9	%			0.5	%			1.3	%
Effects of global financing arrangements	(8.1	)%			(15.6	)%			(13.7	)%
U.S. tax reform	—	%			2.0	%	⁽¹	⁾	—	%
Differences in tax effects on foreign income	(1.8	)%	⁽²	⁾	6.7	%			11.1	%
Liability for uncertain tax positions	1.3	%			6.6	%			—	%
Effect of changes in valuation allowances on deferred tax assets	2.8	%	⁽³	⁾	0.3	%			0.5	%
Excess tax benefits related to stock-based compensation	(2.6	)%			(0.8	)%			—	%
Transaction costs	1.5	%			0.9	%			—	%
Withholding tax	0.6	%			1.2	%			—	%
Other	(0.9	)%			(0.6	)%			0.7	%
Effective tax rate	12.7	%			20.2	%			19.9	%


⁽¹⁾	Includes an $18 million expense related to the re-measurement of certain net deferred tax assets in connection with U.S. tax reform.


⁽²⁾	Mainly attributable to the United States statutory federal income tax rate change from a blended rate for Fiscal 2018 of 31.54% to 21% in Fiscal 2019.


⁽³⁾	Includes an $11 million detriment related to a United Kingdom capital loss.

U.S. Tax Reform

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system including, among other things, lowering U.S. statutory federal tax rate and implementing a territorial tax system. The U.S. statutory federal tax rate has been decreased to 21% for Fiscal 2019 and thereafter. The Tax Act also added many new provisions, including changes to bonus depreciation, limits on the deductions for executive compensation and interest expense, a tax on global intangible low-taxed income, the base erosion anti-abuse tax and a deduction for foreign derived intangible income.

In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin 118 to provide guidance for companies that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. Subsequently, as a result of finalizing its full Fiscal 2018 operating results, the issuance of new interpretive guidance, and other analyses performed, the Company finalized its accounting related to the impacts of the Tax Act and recorded immaterial measurement period adjustments in Fiscal 2019.

Significant components of the Company’s deferred tax assets (liabilities) consist of the following (in millions):



	Fiscal Years Ended
	March 30, 2019			March 31, 2018
Deferred tax assets
Inventories	$	22		$	4
Payroll related accruals	2			2
Deferred rent	34			24
Net operating loss carryforwards	61			31
Stock compensation	13			17
Sales allowances	26			6
Accrued interest	41			—
Other	31			27
	230			111
Valuation allowance	(40		)	(14		)
Total deferred tax assets	190			97

Deferred tax liabilities
Goodwill and intangibles	(534		)	(241		)
Depreciation	18			14
Total deferred tax liabilities	(516		)	(227		)
Net deferred tax liabilities	$	(326	)	$	(130	)

The Company maintains valuation allowances on deferred tax assets applicable to subsidiaries in jurisdictions for which separate income tax returns are filed and where realization of the related deferred tax assets from future profitable operations is not reasonably assured. Deferred tax valuation allowances increased approximately $29 million, $8 million and $4 million in Fiscal 2019, Fiscal 2018 and Fiscal 2017, respectively. The Company remeasured and reduced valuation allowances amounting to approximately $3 million in Fiscal 2019 and released valuation allowances of approximately $1 million and $1 million in Fiscal 2018 and Fiscal 2017, respectively, as a result of the attainment and expectation of achieving profitable operations in certain countries comprising the Company’s European operations, for which deferred tax valuation allowances had been previously established.

At March 30, 2019, the Company had non-U.S. and U.S. net operating loss carryforwards of approximately $405 million, a portion of which will begin to expire in 2020.

As of March 30, 2019 and March 31, 2018, the Company had liabilities related to its uncertain tax positions, including accrued interest, of approximately $203 million and $107 million, respectively, which are included in other long-term liabilities in the Company’s audited consolidated balance sheets. The March 30, 2019 balance includes certain tax reserves which were recorded in purchase accounting upon the acquisition of Versace, in addition to foreign income tax reserves the Company recorded during Fiscal 2019.

The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was approximately$112 million, $101 million and $27 million as of March 30, 2019, March 31, 2018 and April 1, 2017, respectively. A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding accrued interest, for Fiscal 2019, Fiscal 2018 and Fiscal 2017, are presented below (in millions):



	Fiscal Years Ended
	March 30, 2019					March 31, 2018			April 1, 2017
Unrecognized tax benefits beginning balance	$	101				$	27		$	17
Additions related to prior period tax positions	81			⁽¹	⁾	30			2
Additions related to current period tax positions	21					45			10
Decreases in prior period positions due to lapses in statute of limitations	(1		)			(1		)	(2		)
Decreases related to prior period tax positions	(3		)			—			—
Decreases related to audit settlements	(7		)			—			—
Unrecognized tax benefits ending balance	$	192				$	101		$	27


⁽¹⁾	Primarily relates to the Versace acquisition.

The Company classifies interest expense and penalties related to unrecognized tax benefits as components of the provision for income taxes. Interest expense recognized in the consolidated statements of operations and comprehensive income for Fiscal 2019, Fiscal 2018 and Fiscal 2017 was approximately $11 million, $7 million and $3 million, respectively.

The total amount of unrecognized tax benefits relating to the Company’s tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing tax audits and assessments and the expiration of applicable statutes of limitations. The Company anticipates that the balance of gross unrecognized tax benefits, excluding interest and penalties, will be reduced by approximately $34 million during the next 12 months, primarily due to the anticipated tax ruling regarding the deductibility of an intercompany loss in one of our subsidiaries. However, the outcomes and timing of such events are highly uncertain and changes in the occurrence, expected outcomes, and timing of such events could cause the Company’s current estimate to change materially in the future.

The Company files income tax returns in the U.S., for federal, state, and local purposes, and in certain foreign jurisdictions. With few exceptions, the Company is no longer subject to examinations by the relevant tax authorities for years prior to its fiscal year ended April 2, 2016.

Prior to the enactment of the Tax Act, the Company's undistributed foreign earnings were considered permanently reinvested and, as such, United States federal and state income taxes were not previously recorded on these earnings. As a result of the Tax Act, substantially all of the Company’s earnings in foreign subsidiaries generated prior to the enactment of the Tax Act were deemed to have been repatriated and, as a result, the Company recorded a one-time transition tax of $3 million during Fiscal 2018. The Company's intent is to either reinvest indefinitely substantially all of its foreign earnings outside of the United States or repatriate them tax neutrally. However, if in the future earnings are repatriated, the potential exists that the Company may be required to accrue and pay additional taxes, including any applicable foreign withholding tax and income taxes. It is not practicable to estimate the amount of tax that might be payable if these earnings were repatriated due to the complexities associated with the hypothetical calculation.