VMware 2013 Annual Report Download - page 49

Table of Contents
Other Income (Expense), Net
Other income , net of $28 in 2013 changed by $29 compared with other expense , net of $1 in 2012. Other expense, net of $1 in 2012 changed by $48
compared with other income , net of $47 . The changes in 2013 compared with 2012 were primarily due to pre-tax gains of $44 recognized in 2013, as a
result of disposing of certain business activities under our business realignment plan. Partially offsetting this gain was the recognition of an other-than-
temporary impairment charge for a strategic investment in 2013. The changes in 2012 compared with 2011 were primarily due to a $56 gain recognized on
the sale of our investment in Terremark Worldwide, Inc. in 2011.
Income Tax Provision
Our effective income tax rate was 11.6% , 16.5% and 8.9% for 2013 , 2012 and 2011 , respectively. The effective rate in 2013 was lower than 2012
primarily due to the retroactively enacted extension of the federal research credit through December 31, 2013 which was passed by the United States
Congress during January 2013, which decreased our effective rate for 2013 by 7%. The effective tax rate in 2012 was higher than 2011 primarily due to the
federal research credit, which expired at the end of 2011 and was unavailable in 2012. The rate was also negatively impacted by a greater proportion of
earnings in the U.S., which are taxed at a higher rate than our earnings in foreign jurisdictions.
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-US tax jurisdictions and unfavorable changes in non-US tax laws and regulations could
have an adverse effect on our effective tax rate if earnings are lower than anticipated in countries where the statutory tax rates are lower than the US 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.
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.
Although we file a consolidated federal tax return with EMC, the income tax provision is calculated primarily as though we were a separate taxpayer.
However, certain transactions that we and EMC are parties to, are assessed using consolidated tax return rules. 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.
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.
Our Relationship with EMC
As of December 31, 2013 , EMC owned 43,025,000 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.
EMC Reseller Arrangement, Other Services and Note Payable
We and EMC engaged in the following ongoing intercompany transactions, which resulted in revenues and receipts and unearned revenues for us:
47
• Pursuant to an ongoing reseller arrangement with EMC, EMC bundles our products and services with EMC's products and sells them to end-
users.
•
EMC purchases products and services from us for internal use.