VMware 2011 Annual Report Download - page 91

Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VMware that EMC will recognize on its consolidated tax return. EMC refunded income taxes for the 2011 tax year of $138.8 million
to VMware
on a quarterly basis. This represents a significant portion of the 2011 federal income tax refund due from EMC. VMware will finalize the federal
income tax return with EMC in 2012. At December 31, 2010 , VMware had an income tax receivable due from EMC for $144.3 million , which
was primarily comprised of amounts due from EMC for VMware’s stand-alone federal taxable loss for the fiscal year ending December 31,
2010 .
The amounts that VMware either pays to or receives from EMC for its portion of federal income taxes on EMC’s consolidated tax return
differ from the amounts VMware would owe on a stand-alone basis and the difference is presented as a component of stockholders’ equity. In
2011 and 2010 , the difference between the amount of tax calculated on a stand-alone basis and the amount of tax calculated per the tax sharing
agreement was recorded as an increase in stockholders’ equity of $7.8 million and $6.5 million , respectively. In 2009 , the difference between
the amount of tax calculated on a stand-alone basis and the amount of tax calculated per the tax sharing agreement was recorded as a decrease in
stockholders’ equity of $8.0 million .
As of December 31, 2011 , VMware had gross unrecognized tax benefits totaling $85.4 million , which excludes $9.3 million of offsetting
tax benefits. As of December 31, 2010 , VMware had gross unrecognized tax benefits totaling $103.9 million , which excludes $5.4 million of
offsetting tax benefits. Approximately $80.6 million of VMware’s net unrecognized tax benefits, not including interest, 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,
including interest, of $86.6 million as of December 31, 2011 would, if recognized, benefit VMware’s effective income tax rate. The $86.6
million of net unrecognized tax benefits were classified as a non-current liability on the consolidated balance sheet. It is reasonably possible that
within the next 12 months audit resolutions could potentially reduce total unrecognized tax benefits by approximately $7.8 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 $4.1
million of interest as of January 1, 2011 and $6.0 million of interest as of December 31, 2011 associated with unrecognized tax benefits. These
amounts are included as components of the $86.6 million net unrecognized tax benefits at December 31, 2011 and $104.4 million net
unrecognized tax benefits at December 31, 2010 . Income tax expense for the year ended December 31, 2011 included interest of $1.9 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):
Due to the increased complexity in international operations, including judgments in determining the appropriate tax jurisdictions for revenue
and expense items, the Company’s unrecognized tax benefits will likely increase in 2012 . However, the Company cannot reasonably estimate
the increase.
VMware is subject to U.S. federal income tax and various state, local and international income taxes in numerous jurisdictions. VMware's
domestic and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of
recognizing revenues and expenses. Additionally, the amount of income taxes paid is subject to VMware's interpretation of applicable tax laws
in the jurisdictions in which it files.
The U.S. federal income tax audit of the EMC consolidated group for 2009 and 2010 will commence in 2012 . VMware has income tax
audits in progress in numerous state, local and international jurisdictions in which it operates. In the VMware international jurisdictions, which
comprise a significant portion of its operations, the years that may be examined vary, with the earliest year being 2005
. Based on the outcome of
examinations of VMware, the result of the expiration of statutes of limitations for specific jurisdictions or the result of ruling requests from
taxing authorities, it is reasonably possible that the
For the Year Ended December 31,
2011 2010 2009
Balance, beginning of the year
$
109,294
$
84,970
$
48,407
Tax positions related to current year:
Additions
19,323
28,177
38,153
Reductions
(1,788
)
—
—
Tax positions related to prior years:
Additions
6,373
6,850
—
Reductions
(35,090
)
(10,378
)
(3,169
)
Settlements
(2,965
)
—
—
Foreign currency effects
(455
)
(325
)
1,579
Balance, end of the year
$
94,692
$
109,294
$
84,970