13. Taxes

Income Taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the consolidated deferred tax assets and liabilities were (in thousands):

Fiscal Year	2013			2012

Current deferred income tax assets (liabilities):
Bad debt allowance	$	4,467		$	6,542
Returns allowance		14,310			14,835
Inventory		12,169			10,019
Warranty reserve		3,040			2,403
Compensation		9,189			(2,872	)
Accrued liabilities		0			2,600
Returns cost of sales		(5,669	)		(6,005	)
Deferred rent		1,810			804
Loss carryforwards		3,392			1,735
Other		12,070			6,016


Total current deferred tax assets		54,778			36,077
Valuation allowance		(7,946	)		(1,843	)


Net current deferred income tax assets	$	46,832		$	34,234




Total short-term deferred income tax assets	$	46,986		$	34,238
Total short-term deferred income tax liabilities		(154	)		(4	)


Net short-term deferred income tax assets	$	46,832		$	34,234




Long-term deferred income tax (liabilities) assets:
Unrealized exchange losses	$	(1,939	)	$	1,098
State income tax and interest on tax contingencies		160			24
Fixed assets		(50,194	)		(45,237	)
Trade names and customer lists		(6,803	)		(7,139	)
Compensation		4,803			12,010
Deferred rent		7,456			7,732
Loss carryforwards		2,429			3,357
Undistributed earnings of certain foreign subsidiaries		(52,546	)		(51,578	)
Tax deductible foreign reserves		0			335
Other		11,111			10,098


Total deferred income tax liabilities		(85,523	)		(69,300	)
Valuation allowance		(2,601	)		(3,920	)


Net long-term deferred income tax liabilities	$	(88,124	)	$	(73,220	)




Total long-term deferred income tax assets	$	10,044		$	6,536
Total long-term deferred income tax liabilities		(98,168	)		(79,756	)


Net long-term deferred income tax liabilities	$	(88,124	)	$	(73,220	)

Operating Loss Carryforwards. The deferred income tax asset for loss carryforwards includes $21.6 million of net operating losses of foreign subsidiaries. Valuation allowances have been recorded to reflect the estimated amount of deferred tax assets that may not be realized on these losses. The amounts and the fiscal year of expiration of the loss carryforwards are (in thousands):


Expires 2013 through 2017	$	2,559
Expires 2018 through 2022		10,237
Expires 2023 through 2027		2,353
Indefinite		6,456


Total loss carryforwards	$	21,605

The following table identifies income before income taxes for the Company's U.S. and non-U.S. based operations for the fiscal years indicated (in thousands):

Fiscal Year	2013		2012		2011

U.S.	$	194,956	$	193,985	$	173,861
Non-U.S.		366,511		298,237		277,698


Total	$	561,467	$	492,222	$	451,559

The Company's provision for income taxes consisted of the following for the fiscal years indicated (in thousands):

Fiscal Year	2013			2012			2011

Current provision:
U.S. federal	$	97,860		$	64,552		$	59,854
Non-U.S.		69,901			60,239			55,407
State and local		8,297			6,314			7,416


Total current		176,058			131,105			122,677
Deferred provision (benefit)
U.S. federal		(2,346	)		9,485			25,116
Non-U.S.		(166	)		(2,426	)		(4,680	)
State and local		(127	)		(201	)		1,044


Total deferred		(2,639	)		6,858			21,480
Provision for income taxes	$	173,419		$	137,963		$	144,157

The expected cash payments for current U.S. income tax expense for fiscal years 2013, 2012 and 2011 were reduced by approximately $12.0 million, $15.1 million and $11.2 million, respectively, as a result of tax deductions related to the exercise of non-qualified stock options and stock appreciation rights and the vesting of restricted stock and restricted stock units. The expected cash payments for current foreign tax expense for fiscal years 2013, 2012 and 2011 were reduced by $0.8 million, $0.5 million and $1.7 million, respectively, as a result of tax deductions related to the exercise of stock options and the vesting of restricted stock granted to foreign employees. The income tax benefits resulting from these stock-based compensation plans have been recorded to additional paid-in capital in the Company's consolidated balance sheets. Total deferred income tax (benefit) expense of ($2.6) million, $6.9 million and $21.5 million for fiscal years 2013, 2012 and 2011, respectively, are included in deferred income taxes on the Company's consolidated statements of cash flows.

The Company was granted a 60% tax holiday for its watch assembly activities in Switzerland for tax years 2008 through 2012. In 2013, the Company paid the full Swiss tax rate on its watch assembly activities. This tax holiday reduced current foreign income taxes by approximately $1.2 million and $0.9 million in fiscal years 2012 and 2011, respectively.

A reconciliation of the U.S. federal statutory income tax rate of 35% to the Company's effective tax rate is as follows:

Fiscal Year

Tax at statutory rate	35.0	%	35.0	%	35.0	%
State, net of federal tax benefit	0.9		1.0		1.2
Foreign rate differential	(12.5	)	(10.0	)	(12.0	)
U.S. tax on foreign income	5.9		3.1		6.7
Income tax contingencies	0.0		(1.7	)	0.7
Valuation allowances	0.9		0.0		0.0
Other	0.7		0.6		0.3


Provision for income taxes	30.9	%	28.0	%	31.9	%

Deferred U.S. federal income taxes and foreign withholding taxes are not recorded on undistributed earnings of certain foreign subsidiaries where management plans to continue reinvesting these earnings outside the U.S. The amount of undistributed earnings that would be subject to tax if distributed was approximately $653.1 million at December 28, 2013. Determining tax amounts that would be payable if these earnings were distributed to the U.S. parent company is not practicable.

The total amount of unrecognized tax benefits under ASC 740, excluding interest and penalties that would favorably impact the effective tax rate in future periods if recognized, was $9.6 million, $10.7 million and $12.7 million for fiscal years 2013, 2012, and 2011, respectively. The IRS completed its examination of the Company's 2007-2009 federal income tax returns in the first quarter of fiscal 2013. The IRS will begin its examination of the Company's 2010-2012 federal income tax returns in the first quarter of fiscal 2014. The Company is also subject to tax examinations in various state and foreign jurisdictions for the Company's 2006-2012 tax years, none of which the Company believes are individually significant. Audit outcomes and timing of audit settlements are subject to significant uncertainty.

The Company has classified uncertain tax positions as long-term income taxes payable unless such amounts are expected to be paid within twelve months from December 28, 2013. As of December 28, 2013, the Company had recorded $0.2 million of unrecognized tax benefits, excluding interest and penalties, for positions that could be settled within the next twelve months. Consistent with its past practice, the Company recognizes interest and/or penalties related to income tax overpayments and income tax underpayments in income tax expense and income taxes receivable/payable, respectively. The total amount of accrued income tax-related interest in the Company's consolidated balance sheets was $1.2 million and $2.2 million at December 28, 2013 and December 29, 2012, respectively. The total amount of accrued income tax-related penalties in the Company's consolidated balance sheets was $0.4 million and $0.3 million at December 28, 2013 and December 29, 2012, respectively. The Company accrued income tax-related interest (benefit) expense of ($1.0) million, ($1.0) million and $1.2 million in fiscal years 2013, 2012 and 2011, respectively.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the fiscal years indicated (in thousands):

Fiscal Year	2013			2012			2011

Balance at beginning of year	$	15,549		$	17,974		$	10,945
Gross increases tax positions in prior years		3,310			1,245			5,963
Gross decreases tax positions in prior years		(4,384	)		(2,580	)		0
Gross increases—current year tax positions		3,575			2,486			1,192
Settlements		(3,456	)		(3,582	)		(119	)
Lapse in statute of limitations		(297	)		0			0
Increase due to currency revaluation		17			6			(7	)


Balance at end of year	$	14,314		$	15,549		$	17,974