EMC 2010 Annual Report Download - page 74

Table of Contents
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
We have federal and state credit carryforwards of $20.6 million and $23.6 million, respectively. Portions of these carryforwards are subject to annual
limitations, including Section 382 of the Code, as amended, for U.S. tax purposes and similar provisions under other countries' tax laws. Certain of these
credits will begin to expire in 2011, while others have an unlimited carryforward period.
The valuation allowance decreased from $21.8 million at December 31, 2009 to $4.4 million at December 31, 2010. The decrease was attributable to a
reduction for a certain subsidiary's foreign net operating loss carryforward. The valuation allowance relates to foreign net operating loss carryforwards.
Deferred income taxes have not been provided on basis differences related to investments in foreign subsidiaries. These basis differences were
approximately $5.1 billion and $4.3 billion at December 31, 2010 and 2009, respectively, and consisted primarily of undistributed earnings permanently
invested in these entities. The change in the basis difference in 2010 was mainly attributable to income earned in the current year. If these earnings were
distributed to the United States in the form of dividends or otherwise, we would be subject to additional U.S. income taxes. Determination of the amount of
unrecognized deferred income tax liability related to these earnings is not practicable. Income before income taxes from foreign operations for 2010, 2009 and
2008 was $1.2 billion, $0.9 billion and $1.1 billion, respectively.
The following is a rollforward of our gross consolidated liability for unrecognized income tax benefits for the three years ended December 31:
2010 2009 2008
Unrecognized tax benefits, beginning of year $ 197.1 $ 218.5 $ 206.7
Tax positions related to current year:
Additions 47.6 52.1 62.4
Reductions — — —
Tax positions related to prior years:
Additions 23.7 4.6 5.1
Reductions (20.2) (66.7) (40.2)
Settlements (5.0) (2.9) (0.3)
Lapses in statutes of limitations (12.9) (8.5) (15.2)
Unrecognized tax benefits, end of year $ 230.3 $ 197.1 $ 218.5
As of December 31, 2010, 2009 and 2008, $221.8 million, $195.1 million and $213.0 million, respectively, of the unrecognized tax benefits, if
recognized, would have been recorded as a reduction to income tax expense. The remainder would be an adjustment to shareholders' equity.
We have substantially concluded all U.S. federal income tax matters for years through 2006 and are currently under audit for U.S. federal income taxes
for 2007 and 2008. We also have income tax audits in process in numerous state, local and international jurisdictions. In our international jurisdictions that
comprise a significant portion of our operations, the years that may be examined vary, with the earliest year being 2004. Based on the timing and outcome of
examinations of EMC, the result of the expiration of statutes of limitations for specific jurisdictions or the timing and result of ruling requests from taxing
authorities, it is reasonably possible that up to $41.4 million of unrecognized tax positions may be recognized within one year.
The $66.7 million reduction during 2009 for tax positions related to prior years is principally due to the resolution of certain transfer pricing matters and
the completion of the 2005 and 2006 U.S. federal income tax audits.
We recognize interest expense and penalties related to income tax matters in income tax expense. For 2010, $1.1 million in interest expense was
recognized, whereas for 2009 and 2008, $4.3 million and $1.3 million, respectively, in net interest expense was reversed. In addition to the unrecognized tax
benefits noted above, we had accrued interest and penalties of $30.5 million, $29.9 million and $34.2 million as of December 31, 2010, 2009 and 2008,
respectively.
L. Retirement Plan Benefits
401(k) Plan
EMC's Information Infrastructure business has established a deferred compensation program for certain employees that is qualified under
Section 401(k) of the Code. EMC will match pre-tax employee contributions up to 6% of eligible compensation
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