VMware 2013 Annual Report Download - page 31

Table of Contents
implementation period, could adversely affect our business in a number of respects. Additionally, delays in adapting our information systems to address new
business models could limit the success or result in the failure of such initiatives and impair the effectiveness of our internal controls. Even if we do not
encounter these adverse effects, the implementation of these enhancements may be much more costly than we anticipated. If we are unable to successfully
implement the information systems enhancements as planned, our financial condition, results of operations and cash flows could be negatively impacted.
Our financial results may be adversely impacted by higher than expected tax rates, and we may have exposure to additional tax liabilities.
As a multinational corporation, we are subject to income taxes as well as non-income based taxes, such as payroll, sales, use, value-added, net worth,
property and goods and services taxes, in both the United States and various foreign jurisdictions. Our 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 our interpretation of applicable tax laws in the jurisdictions in which we file and changes to tax laws. Significant judgment is required
in determining our worldwide provision for income taxes and other tax liabilities. From time to time, we are subject to income and non-income tax audits.
While we believe we have complied with all applicable income tax laws, there can be no assurance that a governing tax authority will not have a different
interpretation of the law and assess us with additional taxes. Should we be assessed with additional taxes, there could be a material adverse effect on our
financial condition or results of operations.
Our future effective tax rate may be affected by such factors as changes in tax laws, 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, and changes in overall levels of income before tax. For example, the U.S. federal research credit, which provided a significant reduction in our
effective tax rate, expired on December 31, 2013. Without the reinstatement of the U.S. federal research credit, we expect our 2014 effective tax rate to be
higher than the 2013 effective tax rate.
In addition, in the ordinary course of our global business, there are many intercompany transactions and calculations where the ultimate tax
determination is uncertain. Although we believe that our tax estimates are reasonable, we cannot ensure that the final determination of tax audits or tax
disputes will not be different from what is reflected in our historical income tax provisions and accruals.
Additionally, 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%. Recent developments in non-U.S. tax jurisdictions and unfavorable changes in non-U.S. tax laws and
regulations could have an adverse effect on VMware’s effective tax rate if earnings are lower than anticipated in countries where the statutory tax rates are
lower than the U.S. federal tax rate. 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 to such income. If management determines these overseas funds are
needed for our operations in the U.S., we would be required to accrue U.S. taxes on the related undistributed earnings in the period management determines
the earnings will no longer be indefinitely invested outside the United States and to repatriate these funds.
Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events such as pandemics, and to interruption by man-
made problems, such as computer viruses, unanticipated disruptions in local infrastructure or terrorism, which could result in delays or cancellations of
customer orders or the deployment of our products and services.
Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. A significant natural disaster, such as an
earthquake, fire, flood or other act of God, could have a material adverse impact on our business, financial condition and results of operations. As we
continue to grow internationally, increasing amounts of our business will be located in foreign countries that may be more subject to political or social
instability that could disrupt operations. Furthermore, some of our new product initiatives and business functions are hosted and carried out by third parties
that may be vulnerable to disruptions of these sorts, many of which may be beyond our control. In addition, our servers are vulnerable to computer viruses,
break-ins and similar disruptions from unauthorized tampering with our computer systems. Unanticipated disruptions in services provided through localized
physical infrastructure, such as utility or telecommunication outages, can curtail the functioning of local offices as well as critical components of our
information systems, and adversely affect our ability to process orders, provide services, respond to customer requests and maintain local and global business
continuity. Natural disasters that affect the manufacture of IT products, such as the 2011 flooding in Thailand, can also delay customer spending on our
software, which is often coupled with customer purchases of new servers and IT systems. Furthermore, acts of terrorism or war could cause disruptions in our
or our customers’ business or the economy as a whole, and disease pandemics could temporarily sideline a substantial part of our or our customers’
workforce at any particular time. To the extent that such disruptions result in delays or cancellations of customer orders, or the deployment or availability of
our products and services, our revenues would be adversely affected. Additionally, any such catastrophic event could cause us to incur significant costs to
repair damages to our facilities, equipment and infrastructure.
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