Note P — Income Taxes

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

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

Foreign rate differences include $14.8 million in tax benefits in 2012, $1.6 million in 2011 and $5.6 million in 2010 from the favorable audit outcomes on certain tax matters and from expiration of statutes of limitations. 2010 foreign rate differences also include $13.0 million of tax benefits for refund claims related to prior years’ tax filings in a foreign jurisdiction.

VF has been granted a lower effective income tax rate on taxable earnings for years 2010 through 2014 in a foreign jurisdiction based on investment and employment level requirements. This lower rate, when compared with the country’s statutory rate, resulted in an income tax reduction of $6.3 million ($0.06 per diluted share) in 2012, $6.2 million ($0.06 per diluted share) in 2011 and $6.0 million ($0.05 per diluted share) in 2010. In addition, VF has been granted a lower effective income tax rate on taxable earnings in another foreign jurisdiction for the period 2010 through 2019. This lower rate, when compared with the country’s statutory rate, resulted in an income tax reduction of $8.1 million ($0.07 per diluted share) in 2012, $5.5 million ($0.05 per diluted share) in 2011 and $4.5 million ($0.04 per diluted share) in 2010.

Additionally, income tax expense in 2011 and 2010 included $8.5 million and $7.5 million, respectively, of tax credits related to prior years.

Deferred income tax assets and liabilities consisted of the following:

As of the end of 2012, VF has not provided deferred taxes on $1,938.9 million 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 $106.2 million for foreign operating loss carryforwards, of which $92.9 million have an unlimited carryforward life. In addition, there are $7.0 million of potential tax benefits for federal operating loss carryforwards that expire between 2017 and 2027, $12.3 million of benefits for state operating loss carryforwards that expire between 2013 and 2029 and $2.6 million of benefits for federal capital loss carryforwards that expire between 2013 and 2014. Some of the foreign and substantially all of the federal and state operating loss carryforward amounts relate to acquired companies for periods prior to their acquisition by VF. 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 $85.9 million for available foreign operating loss carryforwards, $5.2 million for available state operating loss carryforwards, $2.6 million for federal capital loss carryforwards and $6.0 million for other foreign deferred income tax assets. During 2012, VF had a net decrease in valuation allowances of $17.3 million related to foreign operating loss carryforwards and other deferred tax assets, a decrease of $13.3 million related to federal operating loss carryforwards, a decrease of $2.8 million related to state operating loss carryforwards, a decrease of $15.6 million related to federal capital loss caryforwards, and a decrease of $2.9 million related to foreign currency translation effects. Of the $51.9 million decrease in valuation allowances, $18.0 million relates to the release of valuation allowance in jurisdictions where management believes it is more likely than not that the underlying deferred tax assets are realizable, $15.0 million relates to the utilization of capital loss carryforwards primarily due to the sale of a business (see Note B), $2.9 million relates to foreign currency effects, and $16.0 relates primarily to the write off of deferred taxes in jurisdictions where laws limit the future utilization of certain operating loss carryforwards.

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

The net unrecognized tax benefits and interest of $117.1 million at the end of 2012, 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 foreign jurisdictions. In the United States, the Internal Revenue Service (“IRS”) examination for tax years 2007, 2008 and 2009 was completed in 2012. VF has appealed the results of the 2007 to 2009 examination to the IRS Appeals office. Tax years prior to 2007 have been effectively settled with the IRS, with the exception of outstanding refund claims. 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 to ensure VF’s provision for income taxes is sufficient. 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 $45.2 million within the next 12 months due to settlement of audits and expiration of statutes of limitations, $16.5 million of which would reduce income tax expense.