Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The approximate tax effect of the significant components of Staples' deferred tax assets and liabilities are as follows (in thousands):



	January 28, 2012			January 29, 2011
Deferred income tax assets:
Deferred rent	$	46,446		$	49,256
Foreign tax credit carryforwards	90,730			109,913
Net operating loss carryforwards	313,732			402,136
Capital loss carryforwards	18,598			20,110
Employee benefits	126,632			125,466
Merger related charges	15,072			20,044
Inventory	42,556			52,604
Insurance	39,375			35,891
Deferred revenue	82,724			26,672
Depreciation	32,887			45,362
Unrealized loss on hedge instruments	6,028			4,629
Other—net	77,925			78,786
Total deferred income tax assets	892,705			970,869
Total valuation allowance	(307,616		)	(331,567		)
Net deferred income tax assets	$	585,089		$	639,302
Deferred income tax liabilities:
Intangibles	$	(148,601	)	$	(200,901	)
Other—net	(4,616		)	(3,308		)
Total deferred income tax liabilities	(153,217		)	(204,209		)
Net deferred income tax assets	$	431,872		$	435,093

The deferred tax asset from tax loss carryforwards of $313.7 million represents approximately $1.16 billion of net operating loss carryforwards, $639.9 million of which are subject to expiration beginning in 2012. The remainder has an indefinite carryforward period. The deferred tax asset from foreign tax credit carryforwards of $90.7 million is subject to expiration beginning in 2015. The valuation allowance decreased by $24.0 million during 2011, primarily due to utilization of certain foreign net operating losses.

For financial reporting purposes, consolidated income before income taxes includes the following components (in thousands):



	2011		2010		2009
Pretax income:
United States	$	1,009,979	$	877,936	$	728,765
Foreign	449,162		478,659		427,129
	$	1,459,141	$	1,356,595	$	1,155,894

The provision for income taxes consists of the following (in thousands):



	2011			2010		2009
Current tax expense:
Federal	$	253,078		$	142,282	$	329,809
State	59,877			49,797		42,547
Foreign	155,647			103,317		116,180
Deferred tax expense (benefit):
Federal	75,233			141,103		(63,494		)
State	(4,666		)	6,329		(8,191		)
Foreign	(63,861		)	25,198		(18,068		)
Total income tax expense	$	475,308		$	468,026	$	398,783

A reconciliation of the federal statutory tax rate to Staples' effective tax rate on net income is as follows:



	2011		2010		2009
Federal statutory rate	35.0	%	35.0	%	35.0	%
State effective rate, net of federal benefit	2.6		3.3		2.9
Effect of foreign taxes	(4.6	)	(5.5	)	(3.4	)
Tax credits	(0.5	)	(0.4	)	(0.7	)
Italian tax refund (previously deemed uncollectible)	(1.4	)	—		—
Other	1.5		2.1		0.7
Effective tax rate	32.6	%	34.5	%	34.5	%

The effective tax rate in any year is impacted by the geographic mix of earnings. Additionally, certain foreign operations are subject to both U.S. and foreign income tax regulations, and as a result, income before tax by location and the components of income tax expense by taxing jurisdiction are not directly related.

The tax impact of the unrealized gain or loss on instruments designated as hedges of net investments in foreign subsidiaries is reported in accumulated other comprehensive loss in stockholders' equity.

The Company operates in multiple jurisdictions and could be subject to audit in these jurisdictions. These audits can involve complex issues that may require an extended period of time to resolve and may cover multiple years. In the Company's opinion, an adequate provision for income taxes has been made for all years subject to audit.

Income tax payments were $308.9 million, $404.9 million and $236.1 million during 2011, 2010 and 2009, respectively.

Income taxes have not been provided on certain undistributed earnings of foreign subsidiaries of approximately $896.6 million, net of the noncontrolling interest, because such earnings are considered to be indefinitely reinvested in the business. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable because of the complexities associated with its hypothetical calculation.

Uncertain Tax Positions

At January 28, 2012, the Company had $250.4 million of gross unrecognized tax benefits, of which $247.6 million, if recognized, would affect the Company's tax rate. At January 29, 2011, the Company had $254.2 million of gross unrecognized tax benefits, of which $209.5 million, if recognized, would affect the Company's tax rate. The Company does not reasonably expect any material changes to the estimated amount of liability associated with its uncertain tax positions through fiscal 2012.

The following summarizes the activity related to our unrecognized tax benefits (in thousands):



	2011			2010			2009
Balance at beginning of fiscal year	$	254,167		$	264,277		$	222,892
Additions for tax positions related to current year	48,032			25,876			47,354
Additions (reductions) for tax positions of prior years	15,361			(9,983		)	15,422
Reduction for Statute of Limitations Expiration	(13,441		)	(19,840		)	(20,802		)
Settlements	(53,722		)	(6,163		)	(589		)
Balance at end of fiscal year	$	250,397		$	254,167		$	264,277

The change in uncertain tax positions during 2011 for settlement primarily relates to reductions in deferred tax assets against which a tax reserve had been maintained and had no impact on the overall effective tax rate.

Staples is subject to U.S. federal income tax, as well as income tax of multiple state and foreign jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through 2007. All material state, local and foreign income tax matters for years through 2002 have been substantially concluded.

Staples' continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company had $32.7 million and $30.1 million accrued for gross interest and penalties as of January 28, 2012 and January 29, 2011, respectively.