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. 30, 2017

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



(In thousands)	2017		2016		2015
Domestic	$	364,846	$	301,760	$	741,246
Foreign	1,051,649		982,956		823,011
Income before income taxes	$	1,416,495	$	1,284,716	$	1,564,257

The provision for income taxes consisted of:



(In thousands)	2017			2016			2015
Current:
Federal	$	618,611		$	115,570		$	194,776
Foreign	135,007			123,960			111,976
State	21,506			37,957			33,361
	775,124			277,487			340,113
Deferred:
Federal and state	(76,039		)	(63,610		)	401
Foreign	(3,799		)	(8,015		)	6,687
Income taxes	$	695,286		$	205,862		$	347,201

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act included a broad range of complex provisions impacting the taxation of multi-national companies. Generally, accounting for the impacts of newly enacted tax legislation is required to be completed in the period of enactment, however in response to the complexities and ambiguity surrounding the Tax Act, the SEC released Staff Accounting Bulletin No. 118 (“SAB 118”) to provide companies with relief around the initial accounting for the Tax Act. Pursuant to SAB 118, the SEC has provided a one-year measurement period for companies to analyze and finalize accounting for the Tax Act. During the one-year measurement period, SAB 118 allows companies to recognize provisional amounts when reasonable estimates can be made for the impacts resulting from the Tax Act. VF will finalize accounting for the Tax Act during the one-year measurement period, and any adjustments to the provisional amounts will be included in income tax expense or benefit in the appropriate period, and disclosed if material, in accordance with guidance provided by SAB 118.

While our accounting for the Tax Act is not complete, we have recognized a provisional charge (based on information available as of February 9, 2018) of approximately $465.5 million, primarily comprised of approximately $512.4 million related to the transition tax and approximately $89.5 million tax benefit related to revaluing U.S. deferred tax assets and liabilities using the new U.S. corporate tax rate of 21%. Other provisional charges of $42.6 million were primarily related to U.S. federal and state tax on foreign income and dividends and establishing a deferred tax liability for foreign withholding taxes as the Company is not asserting indefinite reinvestment on its foreign earnings.

The income tax payable attributable to the transition tax is due over an 8-year period beginning in 2018. At December 30, 2017, a noncurrent income tax payable of approximately $430.4 million attributable to the transition tax is reflected in "other liabilities" of the Consolidated Balance Sheet.

The Tax Act has significant complexity and our final tax liability may materially differ from provisional estimates due to additional guidance and regulations that may be issued by the U.S. Treasury Department, the Internal Revenue Service (“IRS”) and state and local tax authorities, and for VF’s finalization of the relevant calculations required by the new tax legislation.

VF continues to analyze the provisions of the Tax Act which are effective after December 30, 2017, including but not limited to, the creation of a new minimum tax called the base erosion anti-abuse tax (“BEAT”); a new provision that taxes U.S. allocated expenses (e.g. interest and general administrative expenses) as well as certain global intangible low-tax income (“GILTI”) from foreign operations; a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; a new limitation on deductible interest expense; and limitations on the deductibility of certain employee compensation. Under GAAP, companies are allowed to make an accounting policy election to either treat taxes resulting from GILTI as a current-period expense when they are incurred or factor such amounts into the measurement of deferred taxes. The Company has not completed its analysis of the effects of the GILTI provisions and will further consider the accounting policy election within the measurement period as provided under SAB 118.

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:



(In thousands)	2017			2016			2015
Tax at federal statutory rate	$	495,772		$	449,650		$	547,489
State income taxes, net of federal tax benefit	23,684			24,426			20,383
Foreign rate differences	(217,131		)	(262,392		)	(193,514		)
Tax reform	465,501			—			—
Capital losses	(67,032		)	—			—
Valuation allowances (federal)	37,296			—			—
Stock compensation (federal)	(22,826		)	(25,135		)	—
Other	(19,978		)	19,313			(27,157		)
Income taxes	$	695,286		$	205,862		$	347,201

Income tax expense includes tax benefits of $10.1 million, $19.4 million and $40.5 million in 2017, 2016 and 2015, 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 was eliminated from the 2016 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 2016 Consolidated Balance Sheet. In October 2016, the FASB issued an update to their accounting guidance on the recognition of current and deferred income taxes for intra-entity asset transfers. The new guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company early adopted this guidance in the first quarter of 2017 using the modified retrospective method, which requires a cumulative adjustment to retained earnings as of the beginning of the period of adoption. The cumulative adjustment to the January 1, 2017 Consolidated Balance Sheet was a reduction in both the other assets and retained earnings line items of $237.8 million.

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. 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 was recorded as an income tax receivable in 2017 based on the expected success of the aforementioned requests for annulment. An additional assessment of €3.1 million ($3.8 million) was received and paid in January 2018. 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 $17.8 million ($0.04 per diluted share) in 2017, $12.0 million ($0.03 per diluted share) in 2016 and $3.2 million ($0.01 per diluted share) in 2015.

Deferred income tax assets and liabilities consisted of the following:



(In thousands)	2017			2016
Deferred income tax assets:
Inventories	$	21,146		$	31,260
Deferred compensation	55,326			87,765
Other employee benefits	45,464			77,360
Stock compensation	45,960			68,722
Other accrued expenses	158,596			157,907
Capital loss carryforwards	34,705			—
Operating loss carryforwards	251,236			152,587
Gross deferred income tax assets	612,433			575,601
Valuation allowances	(225,141		)	(114,990		)
Net deferred income tax assets	387,292			460,611
Deferred income tax liabilities:
Depreciation	25,574			35,461
Intangible assets	237,667			471,493
Other deferred tax liabilities	78,824			58,767
Deferred income tax liabilities	342,065			565,721
Net deferred income tax assets (liabilities)	$	45,227		$	(105,110	)
Amounts included in the Consolidated Balance Sheets:
Other assets (Note I)	$	103,601		$	42,171
Other liabilities (Note M)	(58,374		)	(147,281		)
	$	45,227		$	(105,110	)

VF has potential tax benefits totaling $216.3 million for foreign operating loss carryforwards, of which $190.4 million have an unlimited carryforward life. In addition, there are $0.8 million of potential tax benefits for federal operating loss carryforwards that expire in 2020, $34.7 million of potential tax benefits for capital loss carryforwards that expire in 2022 and $34.2 million of potential tax benefits for state operating loss and credit carryforwards that expire between 2018 and 2037.

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 $163.5 million for available foreign operating loss carryforwards, $27.1 million for available capital loss carryforwards, $22.3 million for available state operating loss and credit carryforwards, and $12.2 million for other foreign deferred income tax assets. During 2017, VF had a net increase in valuation allowances of $27.1 million related to capital loss carryforwards, $5.4 million related to state operating loss and credit carryforwards and an increase of $77.6 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:



(In thousands)	Unrecognized Income Tax Benefits			Accrued Interest and Penalties			Unrecognized Income Tax Benefits Including Interest and Penalties
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
Additions for current year tax positions	28,049			—			28,049
Additions for prior year tax positions	22,968			6,808			29,776
Reductions for prior year tax positions	(22,163		)	(279		)	(22,442		)
Reductions due to statute expirations	(9,028		)	(915		)	(9,943		)
Payments in settlement	(855		)	(248		)	(1,103		)
Currency translation	55			11			66
Balance, December 2017	$	195,992		$	14,086		$	210,078



(In thousands)	2017		2016
Amounts included in the Consolidated Balance Sheets:
Unrecognized income tax benefits, including interest and penalties	$	210,078	$	185,675
Less deferred tax benefits	31,197		35,141
Total unrecognized tax benefits	$	178,881	$	150,534

The unrecognized tax benefits of $178.9 million at the end of 2017, 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 IRS examinations for tax years through 2013 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 tax expense 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 $27.0 million within the next 12 months due to settlement of audits and expiration of statutes of limitations, $24.8 million of which would reduce income tax expense.