VF Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2016

The provision for income taxes was computed based on the following amounts of income from continuing operations before income taxes:



	2016		2015		2014
			In thousands
Domestic	$	404,878	$	853,630	$	815,081
Foreign	1,010,713		853,705		898,495
Income before income taxes	$	1,415,591	$	1,707,335	$	1,713,576

The provision for income taxes consisted of:



	2016			2015		2014
	In thousands
Current:
Federal	$	150,428		$	234,325	$	280,999
Foreign	124,871			113,812		138,552
State	39,390			36,979		44,340
	314,689			385,116		463,891
Deferred:
Federal and state	(63,610		)	401		(78,362		)
Foreign	(8,015		)	6,687		298
Income taxes	$	243,064		$	392,204	$	385,827

The differences between income taxes computed by applying the statutory federal income tax rate and income tax expense reported in the consolidated financial statements are as follows:



	2016			2015			2014
	In thousands
Tax at federal statutory rate	$	495,457		$	597,567		$	599,752
State income taxes, net of federal tax benefit	25,783			23,917			29,118
Foreign rate differences	(271,198		)	(202,420		)	(234,773		)
Stock compensation (federal)	(26,553		)	—			—
Other	19,575			(26,860		)	(8,270		)
Income taxes	$	243,064		$	392,204		$	385,827

Income tax expense includes tax benefits of $19.4 million, $40.5 million and $14.7 million in 2016, 2015 and 2014, respectively, from favorable audit outcomes on certain tax matters and from expiration of statutes of limitations.

On January 4, 2016, VF sold certain intellectual property rights among various subsidiaries, which more closely aligns the intellectual property rights for certain foreign operations with the respective business activities of those operations, consistent with how the intellectual property is used and developed within the business. The sale of these intellectual property rights was classified as an intra-entity transaction under GAAP, and as such, the corresponding gain has been eliminated from the consolidated financial statements, and the tax impact of the gain was established at the transaction date as a deferred charge of $291.1 million within the other assets line item on the Consolidated Balance Sheet (Note H). The deferred charge is being amortized as a component of income tax expense over twenty years, and $14.6 million of the deferred charge was recorded in the income taxes line item in the Consolidated Statement of Income in 2016.

VF was granted a ruling which lowered the effective income tax rate on taxable earnings for years 2010 through 2014 under Belgium’s excess profit tax regime. This lower rate, when compared with the country’s statutory rate, resulted in an income tax reduction of $14.9 million ($0.03 per diluted share) in 2014. In February 2015, the European Union Commission (“EU”) opened a state aid investigation into Belgium’s rulings. On January 11, 2016, the EU announced its decision that these rulings were illegal and ordered that tax benefits granted under these rulings should be collected from the affected companies, including VF.

On March 22, 2016, the Belgium government filed an appeal seeking annulment of the EU decision. Additionally, on June 21, 2016, VF Europe BVBA filed its own application for annulment of the EU decision. Both of the listed requests for annulment remain open and unresolved.

On December 22, 2016, Belgium adopted a law which entitled the Belgium tax authorities to issue tax assessments, and demand timely payments from companies which benefited from the excess profits regime. On January 10, 2017, VF Europe BVBA received an assessment for €31.9 million tax and interest related to excess profits benefits received in prior years. VF Europe BVBA remitted €31.9 million ($33.9 million) on January 13, 2017, which will be recorded as an income tax receivable in 2017 based on the expected success of the aforementioned requests for annulment. If this matter is adversely resolved, these amounts will not be collected by VF.

In addition, VF has been granted a lower effective income tax rate on taxable earnings in another foreign jurisdiction for the years 2010 through 2019. This lower rate, when compared with the country’s statutory rate, resulted in income tax reductions of $12.0 million ($0.03 per diluted share) in 2016, $3.2 million ($0.01 per diluted share) in 2015 and $6.0 million ($0.01 per diluted share) in 2014.

Deferred income tax assets and liabilities consisted of the following:



	2016			2015
	In thousands
Deferred income tax assets:
Inventories	$	40,468		$	38,897
Deferred compensation	88,249			96,397
Other employee benefits	79,834			88,359
Stock compensation	69,010			67,551
Other accrued expenses	168,908			154,337
Operating loss carryforwards	152,587			139,634
Gross deferred income tax assets	599,056			585,175
Valuation allowances	(114,990		)	(100,951		)
Net deferred income tax assets	484,066			484,224
Deferred income tax liabilities:
Depreciation	33,919			27,756
Intangible assets	569,767			591,615
Other deferred tax liabilities	58,767			67,016
Deferred income tax liabilities	662,453			686,387
Net deferred income tax assets (liabilities)	$	(178,387	)	$	(202,163	)
Amounts included in the Consolidated Balance Sheets:
Noncurrent assets (Note H)	$	42,231		$	39,246
Noncurrent liabilities (Note L)	(220,618		)	(241,409		)
	$	(178,387	)	$	(202,163	)

As of the end of 2016, VF has not provided deferred taxes on $4.4 billion of undistributed earnings from international subsidiaries where the earnings are considered to be permanently reinvested. VF’s intent is to continue to reinvest these earnings to support the strategic priority for growth in international markets. If management decides at a later date to repatriate these funds to the U.S., VF would be required to provide taxes on these amounts based on applicable U.S. tax rates, net of foreign taxes already paid. VF has not determined the deferred tax liability associated with these undistributed earnings, as such determination is not practicable.

VF has potential tax benefits totaling $121.3 million for foreign operating loss carryforwards, of which $117.0 million have an unlimited carryforward life. In addition, there are $2.1 million of potential tax benefits for federal operating loss carryforwards that expire between 2017 and 2020, and $29.2 million of potential tax benefits for state operating loss and credit carryforwards that expire between 2017 and 2036.

A valuation allowance has been provided where it is more likely than not that the deferred tax assets related to those operating loss carryforwards will not be realized. Valuation allowances totaled $91.3 million for available foreign operating loss carryforwards, $16.9 million for available state operating loss and credit carryforwards, and $6.8 million for other foreign deferred income tax assets. During 2016, VF had a net increase in valuation allowances of $4.5 million related to state operating loss and credit carryforwards and an increase of $9.5 million related to foreign operating loss carryforwards and other foreign deferred tax assets, inclusive of foreign currency effects.

A reconciliation of the change in the accrual for unrecognized income tax benefits is as follows:



	Unrecognized Income Tax Benefits			Accrued Interest and Penalties			Unrecognized Income Tax Benefits Including Interest and Penalties
	In thousands
Balance, December 2013	$	118,514		$	17,474		$	135,988
Additions for current year tax positions	12,850			—			12,850
Additions for prior year tax positions	5,252			5,033			10,285
Reductions for prior year tax positions	(12,898		)	(2,780		)	(15,678		)
Reductions due to statute expirations	(9,159		)	(647		)	(9,806		)
Payments in settlement	(657		)	(1,742		)	(2,399		)
Currency translation	(298		)	(119		)	(417		)
Balance, December 2014	113,604			17,219			130,823
Additions for current year tax positions	13,470			—			13,470
Additions for prior year tax positions	4,396			3,188			7,584
Reductions for prior year tax positions	(32,432		)	(6,350		)	(38,782		)
Reductions due to statute expirations	(11,780		)	(2,528		)	(14,308		)
Payments in settlement	(11,437		)	(2,065		)	(13,502		)
Currency translation	(144		)	(95		)	(239		)
Balance, December 2015	75,677			9,369			85,046
Additions for current year tax positions	121,025			—			121,025
Additions for prior year tax positions	6,164			2,880			9,044
Reductions for prior year tax positions	(4,798		)	(1,362		)	(6,160		)
Reductions due to statute expirations	(14,985		)	(1,335		)	(16,320		)
Payments in settlement	(6,108		)	(829		)	(6,937		)
Currency translation	(9		)	(14		)	(23		)
Balance, December 2016	$	176,966		$	8,709		$	185,675



	2016		2015
	In thousands
Amounts included in the Consolidated Balance Sheets:
Unrecognized income tax benefits, including interest and penalties	$	185,675	$	85,046
Less deferred tax benefits	35,141		11,973
Total unrecognized tax benefits	$	150,534	$	73,073

The unrecognized tax benefits of $150.5 million at the end of 2016, if recognized, would reduce the annual effective tax rate.

VF files a consolidated U.S. federal income tax return, as well as separate and combined income tax returns in numerous state and international jurisdictions. In the U.S., the Internal Revenue Service (“IRS”) examinations for tax years through 2012 have been effectively settled. The examination of Timberland’s 2011 tax return is ongoing. The IRS has proposed material adjustments to Timberland’s 2011 tax return that would significantly impact the timing of cash tax payments and assessment of interest charges. The Company has formally disagreed with the proposed adjustments. During 2015, VF filed a petition to the U.S. Tax Court to begin the process of resolving this matter, but it has not yet reached a resolution. In addition, VF is currently subject to examination by various state and international tax authorities. Management regularly assesses the potential outcomes of both ongoing and future examinations for the current and prior years, and has concluded that VF’s provision for income taxes is adequate. The outcome of any one examination is not expected to have a material impact on VF’s consolidated financial statements. Management believes that some of these audits and negotiations will conclude during the next 12 months. Management also believes that it is reasonably possible that the amount of unrecognized income tax benefits may decrease by $27.9 million within the next 12 months due to settlement of audits and expiration of statutes of limitations, $25.2 million of which would reduce income tax expense.