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Income Taxes | 24 Months Ended
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Dec. 31, 2019
Income Tax Disclosure [Abstract] |
Income Taxes | Note 19 - Income Taxes We reorganized the Company in Bermuda in 1994 and many of our foreign subsidiaries are not directly or indirectly owned by a U.S. parent. As such, a large portion of our foreign income is not subject to U.S. taxation on a permanent basis under current law. Additionally, our intellectual property is largely owned by foreign subsidiaries, resulting in proportionally higher earnings in jurisdictions with lower statutory tax rates, which decreases our overall effective tax rate. The taxable income earned in each jurisdiction, whether U.S. or foreign, is determined by the subsidiary's operating results and transfer pricing and tax regulations in the related jurisdictions. On March 11, 2021, the American Rescue Plan Act (the “ARP”) was enacted and signed into law. The ARP is an economic stimulus package in response to the COVID-19 outbreak, which contains tax provisions that did not have a material impact to our consolidated financial statements. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted and signed into law. The CARES Act is an emergency economic stimulus package in response to the COVID-19 outbreak that contains numerous tax provisions. Among other things, the CARES Act included technical corrections to the effective date language in the Tax Cuts and Jobs Act, enacted into law on December 22, 2017 (the “Tax Act”), related to net operating loss carrybacks. Upon the enactment of the Tax Act in fiscal 2018, there was a net operating loss on our balance sheet, which was measured using the U.S. statutory tax rate in effect prior to enactment. As a result of the Tax Act, we were required to record a one-time charge of $17.9 million in fiscal 2018, which included a charge of $9.4 million to remeasure the net operating loss at the reduced rate at which it was expected to reverse in the future. The CARES Act effectively reversed the impact of the Tax Act on our net operating loss, resulting in a corresponding tax benefit of $9.4 million recorded in the first quarter of fiscal 2021. The Tax Act introduced new provisions for U.S. taxation of certain global intangible low-taxed income (“GILTI”). The Company continues to elect to account for the tax on GILTI as a period cost and therefore has not recorded deferred taxes related to GILTI on its foreign subsidiaries. In connection with the Tax Act, we repatriated $48.3 million of cash held in our U.S. owned foreign subsidiaries without such funds being subject to further U.S. federal income tax. As of February 28, 2022, we had approximately $38.4 million of undistributed earnings in U.S. owned foreign subsidiaries. While U.S. federal tax expense has been recognized as a result of the Tax Act, no deferred tax liabilities with respect to items such as certain foreign exchange gains or losses, foreign withholding taxes or state taxes have been recognized. No deferred taxes have been provided on the undistributed earnings of our foreign owned subsidiaries since these earnings will continue to be permanently reinvested. Due to the number of legal entities and jurisdictions involved, our legal entity structure, and the tax laws in the relevant jurisdictions, we believe it is not practicable to estimate the amount of additional taxes which may be payable upon distribution of these undistributed earnings. Our components of income before income tax expense are as follows:
| Fiscal Years Ended Last Day of February,
(in thousands) | 2022 |  | 2021 |  | 2020
U.S. | $ | 63,653 |  |  | $ | 48,693 |  |  | $ | 40,146 |
Non-U.S. | 196,313 |  |  | 220,737 |  |  | 125,794 |
Total | $ | 259,966 |  |  | $ | 269,430 |  |  | $ | 165,940 |
Our components of income tax expense (benefit) are as follows:
| Fiscal Years Ended Last Day of February,
(in thousands) | 2022 |  | 2021 |  | 2020
Current: |  |  |  |  |
U.S. federal | $ | 20,907 |  |  | $ | 4,340 |  |  | $ | 12,551 |
State | 6,283 |  |  | 5,892 |  |  | 4,181 |
Non-U.S. | 17,883 |  |  | 9,652 |  |  | 2,571 |
| 45,073 |  |  | 19,884 |  |  | 19,303 |
Deferred: |  |  |  |  |
U.S. federal | (5,269) |  |  | (3,828) |  |  | (4,376) |
State | (1,766) |  |  | (1,795) |  |  | (413) |
Non-U.S. | (1,836) |  |  | 1,223 |  |  | (907) |
| (8,871) |  |  | (4,400) |  |  | (5,696) |
Total | $ | 36,202 |  |  | $ | 15,484 |  |  | $ | 13,607 |
Our total income tax expense differs from the amounts computed by applying the U.S. statutory tax rate to income before income taxes. An income tax rate reconciliation of these differences are as follows:
| Fiscal Years Ended Last Day of February,
| 2022 |  | 2021 |  | 2020
Effective income tax rate at the U.S. statutory rate | 21.0 | % |  | 21.0 | % |  | 21.0 | %
Impact of U.S. state income taxes | 1.4 | % |  | 0.6 | % |  | 1.6 | %
Effect of statutory tax rate in Macau | 0.1 | % |  | (0.7) | % |  | (13.6) | %
Effect of statutory tax rate in Barbados | (11.0) | % |  | (15.4) | % |  | (5.5) | %
Effect of statutory tax rate in Switzerland | (1.2) | % |  | (1.5) | % |  | (0.4) | %
Effect of income from other non-U.S. operations subject to varying rates | 1.2 | % |  | 1.1 | % |  | 2.3 | %
Effect of foreign exchange fluctuations | 0.5 | % |  | (0.1) | % |  | 0.7 | %
Effect of asset impairment charges | — | % |  | 0.3 | % |  | 2.4 | %
Effect of U.S. tax reform | — | % |  | (3.5) | % |  | — | %
Effect of uncertain tax positions | 0.6 | % |  | 3.2 | % |  | (1.7) | %
Effect of non-deductible executive compensation | 1.1 | % |  | 1.0 | % |  | 1.4 | %
Effect of base erosion and anti-abuse tax | — | % |  | (0.6) | % |  | — | %
Other items | 0.2 | % |  | 0.3 | % |  | — | %
Effective income tax rate | 13.9 | % |  | 5.7 | % |  | 8.2 | %
Our Macau subsidiary generates income from the sale of the goods that it has sourced and procured. This subsidiary is responsible for the sourcing and procurement of a large portion of the products that we sell. We previously had an indefinite tax holiday in Macau conditioned on the subsidiary meeting certain employment and investment thresholds. The Macau Offshore Law and its supplementary regulations that grant tax incentives to approved offshore institutions was abolished on January 1, 2021. Existing approved offshore institutions such as ours continued to operate under the offshore regime until the end of the calendar year 2020. Beginning in calendar year 2021, our Macau subsidiary transitioned to onshore status and became subject to a statutory corporate income tax of approximately 12%. Because our Macau subsidiary is not directly or indirectly owned by a U.S. parent, there is no U.S. tax liability associated with the income generated in Macau. Each year there are significant transactions or events that are incidental to our core businesses and that by a combination of their nature and jurisdiction, can have a disproportionate impact on our reported effective tax rates. Without these transactions or events, the trend in our effective tax rates would follow a more normalized pattern. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows:
| Fiscal Years Ended Last Day of February,
(in thousands) | 2022 |  | 2021
Deferred tax assets, gross: |  |  |
Operating loss carryforwards | $ | 13,195 |  |  | $ | 14,785 |
Accounts receivable | 11,144 |  |  | 8,905 |
Inventories | 19,619 |  |  | 12,432 |
Operating lease liabilities | 11,494 |  |  | 10,388 |
Accrued expenses and other | 10,364 |  |  | 10,731 |
Total gross deferred tax assets | 65,816 |  |  | 57,241 |
Valuation allowance | (11,673) |  |  | (15,021) |
Deferred tax liabilities: |  |  |
Operating lease assets | (8,635) |  |  | (7,500) |
Depreciation | (10,589) |  |  | (11,828) |
Amortization | (52,873) |  |  | (6,879) |
Total deferred tax (liabilities) assets, net | $ | (17,954) |  |  | $ | 16,013 |
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We consider the scheduled reversal of deferred tax liabilities, expected future taxable income and tax planning strategies in assessing the ultimate realization of deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not be recoverable. In fiscal 2022, the $3.3 million net decrease in our valuation allowance was principally due to changes in the operating loss carryforwards available to be used in the future. The composition of our operating loss carryforwards at the end of fiscal 2022 is as follows:
|  | February 28, 2022
(in thousands) | Tax Year Expiration Date Range | Deferred Tax Assets |  | Operating Loss Carryforward
U.S. federal operating loss carryforwards | Indefinite | $ | 2,936 |  |  | $ | 13,979 |
U.S. state operating loss carryforwards | 2032-2042 | 732 |  |  | 18,504 |
Non-U.S. operating loss carryforwards with definite carryover periods | 2022-2039 | 4,483 |  |  | 18,072 |
Non-U.S. operating loss carryforwards with indefinite carryover periods | Indefinite | 5,044 |  |  | 15,921 |
Subtotal |  | 13,195 |  |  | $ | 66,476 |
Less portion of valuation allowance established for operating loss carryforwards |  | (9,522) |  |  |
Total |  | $ | 3,673 |  |  |
Any future amount of deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during any carryforward periods are reduced. At February 28, 2022, we had net operating loss carryforwards for U.S. federal income tax purposes as a result of the Osprey acquisition on December 29, 2021. The acquisition was a change in ownership for purposes of Section 382 of the Internal Revenue Code. Therefore, the amount of acquired net operating loss carryforwards that are available to offset future taxable income are subject to an annual limitation. We expect that all of the Osprey acquired net operating loss carryforwards that will be available to us will be utilized during the applicable carryforward period. During fiscal 2022 and 2021, changes in the total amount of unrecognized tax benefits (excluding interest and penalties) were as follows:
| Fiscal Years Ended Last Day of February,
(in thousands) | 2022 |  | 2021
Total unrecognized tax benefits, beginning balance | $ | 5,436 |  |  | $ | 113 |
Tax positions taken during the current period | 949 |  |  | 1,542 |
Changes in tax positions taken during a prior period | 1,409 |  |  | 4,280 |
Impact of foreign currency re-measurement | 50 |  |  | — |
Settlements | (2,221) |  |  | (499) |
Total unrecognized tax benefits, ending balance | 5,623 |  |  | 5,436 |
Less current unrecognized tax benefits | — |  |  | — |
Non-current unrecognized tax benefits | $ | 5,623 |  |  | $ | 5,436 |
If we are able to sustain our positions with the relevant taxing authorities, approximately $5.6 million (excluding interest and penalties) of uncertain tax position liabilities as of February 28, 2022 would favorably impact our effective tax rate in future periods. We do not expect any significant changes to our existing unrecognized tax benefits during the next twelve months resulting from any issues currently pending with tax authorities. We classify interest and penalties on uncertain tax positions as income tax expense. At the end of fiscal 2022 and 2021, the liability for tax-related interest and penalties associated with unrecognized tax benefits was $3.2 million and $2.9 million, respectively. Additionally, during fiscal 2022 and 2021, we recognized tax expense from tax-related interest and penalties of $0.3 million and $2.9 million, respectively, in the consolidated statements of income. We file income tax returns in the U.S. federal jurisdiction and in various states and foreign jurisdictions. As of February 28, 2022, tax years under examination or still subject to examination by material tax jurisdictions are as follows:
Jurisdiction |  | Tax Years Under Examination |  | Open Tax Years
United Kingdom |  | - None - |  | 2021 | — | 2022
U.S. |  | 2017-2018 |  | 2017 | — | 2022
Switzerland |  | - None - |  | 2018 | — | 2022
Hong Kong |  | 2014-2016 |  | 2014 | — | 2022
China |  | 2009-2018 |  | 2009 | — | 2022

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