VMware 2011 Annual Report Download - page 51

Table of Contents
Income Tax Provision
Our effective tax rate for 2011 was 8.9% as compared with 14.2% for 2010 and 11.8% for 2009. The lower effective tax rate in 2011 as
compared to 2010 was primarily attributable to (i) a favorable impact of 3.1% resulting from a shift in the mix of income before tax from the
U.S. to international jurisdictions primarily resulting from how certain expenses are allocated to our world-wide subsidiaries, (ii) a favorable
impact of 2.6% resulting from a decrease in unrecognized tax positions relative to income before income tax primarily due to audit settlements,
and (iii) a favorable impact of 1.7% resulting from the finalization of the 2010 tax returns related to changes in estimates in how certain expenses
are allocated to our world-wide subsidiaries and a change in estimate in the U.S. federal research tax credit calculation. These favorable changes
were partially offset by an unfavorable impact of 1% from a decrease in the U.S. state deferred tax assets due to a decrease in our future effective
state tax rate. The increase in effective tax rate to 14.2% in 2010 from 11.8% in 2009 was primarily attributable to a jurisdictional shift of
income from lower-tax jurisdictions to the U.S., which was partially offset by a decrease in unrecognized tax positions relative to income before
income tax.
Our rate of taxation in foreign jurisdictions is lower than the U.S. tax rate. Our international income is primarily earned by our subsidiaries
in Ireland, where the statutory tax rate is 12.5%. We do not believe that any recent or currently expected developments in non-U.S. tax
jurisdictions are reasonably likely to have a material impact on our effective tax rate. As of December 31, 2011, our total cash, cash equivalents,
and short-term investments were $4,512.3 of which $2,072.0 were held outside the U.S. If these overseas funds are needed for our operations in
the U.S., we would be required to accrue and pay U.S. taxes on related undistributed earnings to repatriate these funds. However, our intent is to
indefinitely reinvest our non-U.S. earnings in our foreign operations and our current plans do not demonstrate a need to repatriate them to fund
our U.S. operations. We will meet our U.S. liquidity needs through ongoing cash flows generated from our U.S. operations, external borrowings,
or both. We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in
which it is needed. All income earned abroad, except for previously taxed income for U.S. tax purposes, is considered indefinitely reinvested in
our foreign operations and no provision for U.S. taxes has been provided with respect thereto.
Our future effective tax rate may be affected by such factors as changes in tax laws, changes in our business, regulations, or rates, changing
interpretation of existing laws or regulations, the impact of accounting for stock-based compensation, the impact of accounting for business
combinations, changes in our international organization, shifts in the amount of income before tax earned in the U.S. as compared with other
regions in the world, and changes in overall levels of income before tax. The 2012 tax rate is expected to be higher than the fiscal year 2011 tax
rate primarily due to the expectation that the amount of benefit related to unrecognized tax positions released during 2012 will be lower than the
amount released during 2011, relative to income before income tax, and due to the expiration of the federal R&D credit on December 31, 2011.
The effective tax rate for fiscal year 2012 is based upon the income for the year, the composition of the income in different countries, and
adjustments, if any, for the potential tax consequences related to the resolution of audits or changes in uncertain tax positions. Our aggregate
income tax rate in foreign jurisdictions is lower than our income tax rate in the United States.
Although we file a federal consolidated tax return with EMC, we calculate our income tax provision on a stand-alone basis. Our effective
tax rate in the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates.
The rate at which the provision for income taxes is calculated differs from the U.S. federal statutory income tax rate primarily due to different
tax rates in foreign jurisdictions where income is earned and considered to be indefinitely reinvested.
We have been included in the EMC consolidated group for U.S. federal income tax purposes, and expect to continue to be included in such
consolidated group for periods in which EMC owns at least 80% of the total voting power and value of our outstanding stock as calculated for
U.S. federal income tax purposes. The percentage of voting power and value calculated for U.S. federal income tax purposes may differ from the
percentage of outstanding shares beneficially owned by EMC due to the greater voting power of our Class B common stock as compared to our
Class A common stock and other factors. Each member of a consolidated group during any part of a consolidated return year is jointly and
severally liable for tax on the consolidated return of such year and for any subsequently determined deficiency thereon. Should EMC's ownership
fall below 80% of the total voting power or value of our outstanding stock in any period, then we would no longer be included in the EMC
consolidated group for U.S. federal income tax purposes, and thus we would no longer be liable in the event that any income tax liability was
incurred, but not discharged, by any other member of the EMC consolidated group. Additionally, our U.S. federal income tax would be reported
separately from that of the EMC consolidated group.
Our Relationship with EMC
As of December 31, 2011 , EMC owned 37,642,000 shares of Class A common stock and all 300,000,000 shares of Class B common stock,
representing 79.7% of our total outstanding shares of common stock and 97.2%
of the combined voting power of our outstanding common stock.
In April 2011, we acquired certain assets relating to EMC’s Mozy cloud-based data storage and data services, including
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