VMware 2013 Annual Report Download - page 84

Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pursuant to the tax sharing agreement, VMware has made payments to EMC and EMC has made payments to VMware. The following table summarizes
these payments made between VMware and EMC during the years ended December 31, 2013 , 2012 and 2011 (table in millions):
Payments between VMware and EMC under the tax sharing agreement relate to VMware's portion of federal income taxes on EMC's consolidated tax
return as well as the state payments for combined states. Payments from EMC to VMware relate to periods where VMware had a stand-alone loss for U.S.
federal and state income tax purposes or where VMware had federal tax credits in excess of federal tax liabilities. Payments from VMware to EMC are for
estimated tax payments primarily for U.S. federal income tax purposes. 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 separate return basis and the difference is presented
as a component of stockholders’ equity. In the year ended December 31, 2013 and 2012 , the difference between the amount of tax calculated on a separate-
return basis and the amount of tax calculated per the tax sharing agreement was recorded as a decrease in stockholders’ equity totaling $3 million and
$4 million , respectively. In 2011 , the difference between the amount of tax calculated on a separate-return basis and the amount of tax calculated per the tax
sharing agreement was recorded as an increase in stockholder’s equity of $8 million .
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest and penalties associated with unrecognized
tax benefits, is as follows (table in millions):
The net unrecognized tax benefits, including interest and penalties, of $169 million as of December 31, 2013 would, if recognized, benefit VMware’s
effective income tax rate. The $169 million of net unrecognized tax benefits were classified as a non-current liability within other liabilities on the
consolidated balance sheet. VMware recognizes interest expense and penalties related to income tax matters in the income tax provision. VMware had
accrued $13 million of interest and penalties as of December 31, 2013 and $8 million of interest and penalties as of December 31, 2012 associated with
unrecognized tax benefits. Income tax expense for the year ended December 31, 2013 included interest and penalties of $5 million associated with uncertain
tax positions.
The U.S. federal income tax audit of the EMC consolidated group for 2009 and 2010 commenced in 2012 and is ongoing as of December 31, 2013 .
VMware has income tax audits in progress in numerous state, local and international jurisdictions in which it operates. The years that may be examined vary
for VMware international jurisdictions, which comprise a significant portion of its operations, with the earliest year being 2008 . It is reasonably possible that
within the next 12 months audit resolutions could potentially reduce total unrecognized tax benefits by approximately $4 million . Audit outcomes and the
timing of audit settlements are subject to significant uncertainty.
81
For the Year Ended December 31,
2013
2012 2011
Payments from VMware to EMC
$
8
$
—
$
12
Payments from EMC to VMware
32
19
314
For the Year Ended December 31,
2013 2012 2011
Balance, beginning of the year
$
158
$
95
$
109
Tax positions related to current year:
Additions
32
12
19
Reductions
—
(
4
)
(2
)
Tax positions related to prior years:
Additions related to acquisitions completed in 2012
—
60
—
Additions
—
—
3
Reductions
(12
)
—
(
9
)
Settlements
(2
)
—
(
23
)
Reductions resulting from a lapse of the statute of limitations
(8
)
(4
)
(2
)
Foreign currency effects
(1
)
(1
)
—
Balance, end of the year
$
167
$
158
$
95