VMware 2014 Annual Report Download - page 91

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, 2014 , 2013 and 2012 (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. 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, 2014 , 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 $12 million , $3 million and $4 million ,
respectively.
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 $197 million as of December 31, 2014 would, if recognized, benefit
VMware’s annual effective income tax rate. The $197 million of net unrecognized tax benefits were classified as a non-current liability within
other liabilities on the consolidated balance sheets. VMware recognizes interest expense and penalties related to income tax matters in the
income tax provision. VMware had accrued $22 million of interest and penalties as of December 31, 2014 and $13 million of interest and
penalties as of December 31, 2013 associated with unrecognized tax benefits. Income tax expense for the year ended December 31, 2014
included interest and penalties of $8 million associated with uncertain tax positions.
The EMC consolidated group is routinely under audit by the Internal Revenue Service (the “IRS”).
All U.S. federal income tax matters have
been concluded for years through 2008. The IRS commenced a federal income tax audit for the tax years 2009 and 2010 in the third quarter of
2012. The current federal income tax audit is ongoing and it is not expected to be completed until 2015.
VMware also has income tax audits in progress in numerous state and local jurisdictions. In its international jurisdictions that comprise a
significant portion of its operations, the years that may be examined vary, with the earliest year being 2008. In
86
For the Year Ended December 31,
2014
2013 2012
Payments from VMware to EMC
$
150
$
8
$
—
Payments from EMC to VMware
—
32
19
For the Year Ended December 31,
2014
2013 2012
Balance, beginning of the year
$
167
$
158
$
95
Tax positions related to current year:
Additions
32
32
12
Reductions
—
—
(
4
)
Tax positions related to prior years:
Additions related to acquisitions completed in 2012
—
—
60
Additions
1
—
—
Reductions
(3
)
(12
)
—
Settlements
(1
)
(2
)
—
Reductions resulting from a lapse of the statute of limitations
(2
)
(8
)
(4
)
Foreign currency effects
(4
)
(1
)
(1
)
Balance, end of the year
$
190
$
167
$
158