VMware 2007 Annual Report Download - page 78

Table of Contents
VMWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
VMware has federal net operating loss carryforwards of $14.5 million from acquisitions in 2007, 2006 and 2005. These carryforwards
expire at different periods through 2026. Portions of these carryforwards are subject to annual limitations, including Section 382 of the Internal
Revenue Code of 1986, as amended (the “Code”), for U.S. tax purposes. VMware expects to be able to fully use these net operating losses
against future income. Also resulting from 2007 and 2006 acquisitions, the Company has federal R&D credit carryforwards of $0.4 million
expiring at different periods through 2026, and state net operating loss carryforwards of $1.1 million expiring at different periods through 2015.
Deferred income taxes have not been recorded on basis differences related to investments in foreign subsidiaries. These basis differences
were approximately $181.9 million and $12.9 million at December 31, 2007 and 2006, respectively, and consisted of undistributed earnings
permanently invested in these entities. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not
practicable. Income before income taxes from foreign operations for 2007, 2006 and 2005 was $197.6 million, $82.0 million and $48.5 million,
respectively.
The difference between the income taxes payable that is calculated on a separate return basis and the amount actually paid to EMC
pursuant to VMware’s tax sharing agreement is presented as a component of additional paid-in capital. These differences resulted in a decrease
in additional paid-in capital of $2.5 million and $32.3 million in 2007 and 2006, respectively.
VMware adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”), at the beginning of fiscal year
2007. VMware had no changes to the amount of income tax payable as a result of implementing FIN No. 48. Prior to the adoption of FIN
No. 48, VMware
’s policy was to classify accruals for uncertain positions as a current liability unless it was highly probable that there would not
be a payment or settlement for such identified risks for a period of at least a year. On January 1, 2007, VMware reclassified $4.5 million of
income tax liabilities, inclusive of $4.4 million in uncertain tax benefits and $0.1 million of accrued interest, from current to non-current
liabilities because a cash settlement of these liabilities was not anticipated within one year of the balance sheet date.
As of January 1, 2007, VMware had $4.4 million of remaining net unrecognized tax benefits, which, if recognized, would be a reduction to
income tax expense impacting the effective income tax rate. As of December 31, 2007, VMware had $18.3 million of net unrecognized tax
benefits, of which, if recognized, $12.3 million would be a reduction to income tax expense impacting the effective income tax rate and $6
million would be a reduction to goodwill. The $18.3 million of net unrecognized tax benefits are not expected to be paid within the next twelve
months and were classified as a non-current liability on the consolidated balance sheet.
VMware recognizes interest expense and penalties related to income tax matters in the income tax provision. In addition to the
unrecognized tax benefits noted above, VMware had accrued $0.1 million of interest as of January 1, 2007 and $0.3 million of interest as of
December 31, 2007. Income tax expense for the year ended December 31, 2007 included interest of $0.2 million associated with uncertain tax
positions.
A reconciliation of total gross unrecognized tax benefits for the year ended December 31, 2007 is as follows (table in thousands):
74
For the Year Ended
December 31, 2007
Balance as of January 1, 2007
$
5,160
Tax positions related to current year:
Additions
14,038
Balance at December 31, 2007
$
19,198