VMware 2012 Annual Report Download - page 93

Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VMware has U.S. federal net operating loss carryforwards of $130.1 million from acquisitions made since 2007 . These carryforwards
expire at different periods through 2031 . Portions of these carryforwards are subject to annual limitations. VMware expects to be able to fully
use these net operating losses against future income. Also resulting from acquisitions since 2006 , VMware has state net operating loss
carryforwards of $231.0 million expiring at different periods through 2031 . A valuation allowance was recorded to reduce gross deferred tax
assets to an amount VMware believes is more likely than not to be realized. The valuation allowance is attributable to the uncertainty regarding
the realization of state tax credit carryforward benefits. VMware has non-U.S. net operating losses and credits of $14.9 million resulting from a
non-U.S. acquisition in 2009 . These net operating losses have an unlimited carryforward period. VMware expects to be able to fully use these
net operating losses against future non-U.S. income. Also, VMware has non-U.S. net operating losses of $9.3 million that are subject to a full
valuation allowance as VMware believes it is more likely than not that no
tax benefit will be realized from these losses. These are primarily from
a 2009 acquisition.
U.S. income taxes have not been provided on certain undistributed earnings of non-U.S. subsidiaries of approximately $2,001.6 million and
$1,560.9 million at December 31, 2012 and 2011 , respectively, because such earnings are considered to be reinvested indefinitely outside of the
U.S., or will be remitted substantially free of additional tax. VMware's rate of taxation in foreign jurisdictions is lower than the U.S. tax rate.
VMware's international income is primarily earned by VMware's subsidiaries in Ireland, where the statutory tax rate is 12.5% . Management
does not believe that any recent or currently expected developments in non-U.S. tax jurisdictions are reasonably likely to have a material impact
on VMware's effective tax rate. All income earned abroad, except for previously taxed income for U.S. tax purposes, is considered indefinitely
reinvested in VMware's foreign operations and no provision for U.S. taxes has been provided with respect to such income.
As of December 31, 2012 , VMware's total cash, cash equivalents, and short-term investments were $4,630.8 million , of which $2,996.7
million was held outside the U.S. VMware's intent is to indefinitely reinvest its non-U.S. funds in its foreign operations, and VMware's current
plans do not demonstrate a need to repatriate them to fund its U.S. operations. VMware plans to meet its U.S. liquidity needs through cash flows
from operations, external borrowings, or both. VMware utilizes a variety of tax planning strategies in an effort to ensure that its worldwide cash
is available in the locations in which it is needed. If VMware determines these overseas funds are needed for its operations in the U.S., the
Company would be required to accrue U.S. taxes on the related undistributed earnings in the period VMware determines the earnings will no
longer be indefinitely invested outside the U.S. in order to repatriate these funds. At this time, it is not practicable to estimate the amount of tax
that may be payable were VMware to repatriate these funds.
VMware is included in the EMC consolidated group for U.S. federal income tax purposes. As of December 31, 2012 , VMware had a net
income tax payable of $31.9 million , which was included in accrued expenses and other on its consolidated balance sheet. This net amount is
primarily comprised of amounts due to and due from EMC under the tax sharing agreement. VMware has stand-alone taxable income for the
year ended
December 31, 2012 . Under the tax sharing agreement with EMC, VMware is obligated to pay EMC an amount equal to the tax
liability generated by VMware that EMC will incur on its consolidated tax return. VMware will finalize the 2012 federal tax return with EMC in
2013. At December 31, 2011 , VMware had a net income tax payable due to EMC of $3.3 million , which was primarily comprised of amounts
due to and due from EMC under the tax sharing agreement. During the year ended December 31, 2012 , EMC paid VMware $19.3 million
due to
VMware's various state taxable losses for the years ended December 31, 2011 and 2010 . These losses were primarily attributable to tax
deductions arising from both non-qualified stock option exercises and from restricted stock when the restrictions lapsed.
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 stand-alone basis and the difference is presented as a component of stockholders’ equity. In
2012 , the difference between the amount of tax calculated on a stand-alone basis and the amount of tax calculated per the tax sharing agreement
was recorded as a decrease in stockholders' equity of $4.4 million . In 2011 and 2010 , the difference between the amount of tax calculated on a
stand-alone basis and the amount of tax calculated per the tax sharing agreement was recorded as an increase in stockholders’ equity of $7.8
million and $6.5 million , respectively.
As of December 31, 2012 , VMware had gross unrecognized tax benefits totaling $150.9 million , which excludes $6.9 million of offsetting
tax benefits. As of December 31, 2011 , VMware had gross unrecognized tax benefits totaling $85.4 million , which excludes $9.3 million of
offsetting tax benefits. Approximately $143.5 million of VMware’s net unrecognized tax benefits, not including interest, if recognized, would
reduce income tax expense and lower VMware’s effective tax rate in the period or periods recognized. The net unrecognized tax benefits,
including interest, of $151.5 million as of December 31, 2012 would, if recognized, benefit VMware’s effective income tax rate. The $151.5
million of net unrecognized tax benefits were classified as a non-current liability within other liabilities on the consolidated balance sheet. It is
reasonably possible that within the next 12 months audit resolutions could potentially reduce total unrecognized tax benefits by approximately
$10.1 million . Audit outcomes and the timing of audit settlements are subject to significant uncertainty.
87