VMware 2007 Annual Report Download - page 52

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Table of Contents
Provision for Income Taxes
Our effective income tax rate was 9.3% for 2007, 30.1% for 2006 and 30.0% for 2005.
The change in the effective rate which decreased to 9.3% in 2007 from 30.1% in 2006 was primarily attributable to the decrease in the
other non-deductible permanent differences of 17.2 percentage points from 2006 to 2007. This decrease was primarily attributable to the change
of the Company’s tax structure, whereby income in 2007 earned abroad principally qualifies for deferral from United States taxation, whereas in
2006 the income was principally taxed in the United States. The other significant contributing factor to the decrease in the effective tax rate from
2006 to 2007 was that our aggregate income tax rate in foreign jurisdictions, which is typically lower than our income tax rate in the United
States, resulted in an increase of a favorable tax benefit of 4 percentage points from 2006 to 2007. Offsetting this favorable tax benefit was the
decrease in the generated tax credits by 0.4 percentage points from 2006 to 2007.
The effective tax rates in 2006 and 2005 were essentially the same at 30.1% and 30.0%. We derived a tax benefit from our aggregate
income tax rate in foreign jurisdictions which is typically lower than our income tax rate in the United States resulting in an increase in the
favorable rate impact of 4.3 percentage points from 2005 to 2006. We generated tax credits which increased our favorable tax benefits by 1.0
percentage point from 2005 to 2006. The state taxes net of federal income tax benefit decreased from 2005 to 2006 by 0.7 percentage points
which was also a favorable adjustment to the effective tax rate in 2006. Offsetting these was the unfavorable change in other non-deductible
permanent differences which increased by 6.1 percentage points from 2005 to 2006. The increase in the other nondeductible permanent
differences from 2005 to 2006 is primarily attributable to the phase-out of the Extraterritorial income tax benefit which was repealed by the
American Jobs Creation Act of 2004.
Our effective tax rate for 2008 is expected to be higher due in part to the repeal of the U.S. Federal R&D tax credit. The effective tax rate
for 2008 is based upon the income for the year, the composition of the income in different countries, and adjustments, if any, for the potential tax
consequences, benefits, resolutions of audits or other tax contingencies. Our aggregate income tax rate in foreign jurisdictions is lower than our
income tax rate in the United States.
Non
-GAAP Financial Measures
Regulation S-K Item 10(e), Use of Non-GAAP Financial Measures in Commission Filings, and other Securities Exchange Commission
(“SEC”) regulations define and prescribe the conditions for use of certain non-GAAP financial information. Our measures of costs of revenues
and operating expenses without stock-based compensation meet the definition of non-GAAP financial measures. These non-GAAP financial
measures, which are used as measures of our performance, should be considered in addition to, not as a substitute for or in isolation from,
measures of our financial performance prepared in accordance with GAAP. We provide this information to show the impact of stock-based
compensation on our results of operations, as it is excluded from our internal operating plans and measurement of financial performance
(although we consider the dilutive impact to our shareholders when awarding stock-based compensation and value such awards accordingly),
and because determining the fair value of the related equity awards involves a high degree of judgment and estimation.
Costs of revenues and operating expenses without stock-based compensation have limitations due to the fact that they do not include all
expenses related to the compensation of our people. More specifically, if we did not pay out a portion of our compensation in the form of stock-
based compensation, the cash salary expense included in our costs of revenues and operating expenses would be higher. We compensate for this
limitation by providing supplemental information about outstanding stock-based awards in the footnotes to our financial statements. Stock-
based
compensation programs are an important element of our compensation structure and all forms of stock-based awards are valued and included as
appropriate in results of operations. Management strongly encourages shareholders to review our financial statements and publicly-filed reports
in their entirety and not to rely on any single financial measure.
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