VMware 2010 Annual Report Download - page 98

Table of Contents
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
tax sharing agreement with EMC, EMC is obligated to pay to VMware an amount equal to the tax benefit generated by VMware that EMC will
recognize on its consolidated tax return. At December 31, 2009, VMware had an income tax receivable due from EMC for $3.0 million as a
result of comparing the state tax provision for fiscal year ended December 31, 2008 to the final tax return. During the year ended December 31,
2009, EMC paid VMware $107.6 million due to VMware’s stand-
alone taxable loss for the year ended December 31, 2008, which was primarily
attributable to tax deductions arising from both non-
qualified stock option exercises and from restricted stock when the restrictions lapsed. Under
the tax sharing agreement with EMC, EMC is obligated to pay VMware an amount equal to the tax benefit generated by VMware that EMC will
recognize on its consolidated tax return.
The difference between the income taxes payable that is calculated on a separate return basis and the amount actually paid to EMC
pursuant to VMware’s tax sharing agreement is presented as a component of additional paid-in capital. These differences resulted in an increase
in additional paid-in capital of $6.5 million in the year ended December 31, 2010 and a decrease in additional paid-in capital of $8.0 million in
the year ended December 31, 2009.
As of December 31, 2010, VMware had gross unrecognized tax benefits totaling $103.9 million, which excludes $5.4 million of offsetting
tax benefits. As of December 31, 2009, VMware had gross unrecognized tax benefits totaling $80.8 million, which excludes $4.2 million of
offsetting tax benefits. Approximately $104.4 million of VMware’s unrecognized tax benefits, if recognized, would reduce income tax expense
and lower VMware’s effective tax rate in the period or periods recognized. The net unrecognized tax benefits of $104.4 million as of
December 31, 2010 would, if recognized, benefit VMware’s effective income tax rate. The $104.4 million of net unrecognized tax benefits were
classified as a non-current liability on the consolidated balance sheet. It is reasonably possible within the next 12 months that audit resolutions
could potentially reduce total unrecognized tax benefits by between approximately $20 million and $24 million. Audit outcomes and the timing
of audit settlements are subject to significant uncertainty.
VMware recognizes interest expense and penalties related to income tax matters in the income tax provision. VMware had accrued $3.9
million of interest as of January 1, 2010 and $4.1 million of interest as of December 31, 2010 associated with unrecognized tax benefits. These
amounts are included as components of the $104.4 million net unrecognized tax benefits at December 31, 2010 and $78.0 million net
unrecognized tax benefits at December 31, 2009. Income tax expense for the year ended December 31, 2010 included interest of $0.3 million
associated with uncertain tax positions.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest associated with unrecognized
tax benefits, is as follows (table in thousands):
95
For the Year Ended December 31,
2010
2009
2008
Balance, beginning of the year
$
84,970
$
48,407
$
19,198
Tax positions related to current year:
Additions
28,177
38,153
30,089
Tax positions related to prior years:
Additions
6,850
—
503
Reductions
(10,378
)
(3,169
)
—
Foreign currency effects
(325
)
1,579
(1,383
)
Balance, end of the year
$
109,294
$
84,970
$
48,407