Cisco 2012 Annual Report Download - page 41

2008 and the related asserted claims by the tax authorities from the state of Sao Paulo are for calendar years 2005
through 2007. The total asserted claims by Brazilian state and federal tax authorities aggregate to approximately
$427 million for the alleged evasion of import and other taxes, approximately $1.0 billion for interest, and
approximately $1.9 billion for various penalties, all determined using an exchange rate as of July 28, 2012. We
have completed a thorough review of the matters and believe the asserted tax claims against us are without merit,
and we are defending the claims vigorously. While we believe there is no legal basis for our alleged liability, due
to the complexities and uncertainty surrounding the judicial process in Brazil and the nature of the claims
asserting joint liability with the importer, we are unable to determine the likelihood of an unfavorable outcome
against us and are unable to reasonably estimate a range of loss, if any. We do not expect a final judicial
determination for several years. An unfavorable resolution of lawsuits or governmental investigations could have
a material adverse effect on our business, operating results, or financial condition. For additional information
regarding certain of the matters in which we are involved, see Item 3, “Legal Proceedings,” contained in Part I of
this report.
CHANGES IN OUR PROVISION FOR INCOME TAXES OR ADVERSE OUTCOMES RESULTING
FROM EXAMINATION OF OUR INCOME TAX RETURNS COULD ADVERSELY AFFECT OUR
RESULTS
Our provision for income taxes is subject to volatility and could be adversely affected by earnings being lower
than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher
tax rates; by changes in the valuation of our deferred tax assets and liabilities; by expiration of or lapses in the
R&D tax credit laws; by transfer pricing adjustments, including the effect of acquisitions on our intercompany
R&D cost sharing arrangement and legal structure; by tax effects of nondeductible compensation; by tax costs
related to intercompany realignments; by changes in accounting principles; or by changes in tax laws and
regulations, including possible U.S. changes to the taxation of earnings of our foreign subsidiaries, the
deductibility of expenses attributable to foreign income, or the foreign tax credit rules. Significant judgment is
required to determine the recognition and measurement attribute prescribed in the accounting guidance for
uncertainty in income taxes. The accounting guidance for uncertainty in income taxes applies to all income tax
positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely
impact our provision for income taxes or additional paid-in capital. Further, as a result of certain of our ongoing
employment and capital investment actions and commitments, our income in certain countries is subject to
reduced tax rates and in some cases is wholly exempt from tax. Our failure to meet these commitments could
adversely impact our provision for income taxes. In addition, we are subject to the continuous examination of our
income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood
of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income
taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse
effect on our operating results and financial condition.
OUR BUSINESS AND OPERATIONS ARE ESPECIALLY SUBJECT TO THE RISKS OF
EARTHQUAKES, FLOODS, AND OTHER NATURAL CATASTROPHIC EVENTS
Our corporate headquarters, including certain of our research and development operations are located in the
Silicon Valley area of Northern California, a region known for seismic activity. Additionally, a certain number of
our facilities are located near rivers that have experienced flooding in the past. Also certain of our suppliers and
logistics centers are located in regions that have or may be affected by recent earthquake, tsunami and flooding
activity which has and could continue to disrupt the flow of components and delivery of products. A significant
natural disaster, such as an earthquake, a hurricane, volcano, or a flood, could have a material adverse impact on
our business, operating results, and financial condition.
MAN-MADE PROBLEMS SUCH AS COMPUTER VIRUSES OR TERRORISM MAY DISRUPT OUR
OPERATIONS AND HARM OUR OPERATING RESULTS
Despite our implementation of network security measures our servers are vulnerable to computer viruses, break-
ins, and similar disruptions from unauthorized tampering with our computer systems. Any such event could have
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