Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes

L.       Income Taxes

Our provision (benefit) for income taxes consists of (table in thousands):

	2011		2010		2009
Federal:
Current	$	488,031	$	518,309	$	181,578
Deferred		14,333		4,170		7,977
		502,364		522,479		189,555
State:
Current		70,676		49,488		13,114
Deferred		(45,272)		(20,419)		13,419
		25,404		29,069		26,533
Foreign:
Current		101,101		120,287		30,885
Deferred		11,516		(33,538)		5,802
		112,617		86,749		36,687
Total provision for income taxes	$	640,385	$	638,297	$	252,775

In 2011, 2010 and 2009, we were able to utilize $19.5 million, $46.9 million and $68.9 million, respectively, of net operating loss carryforwards and tax credit carryforwards to reduce the current portion of our tax provision.

The effective income tax rate 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 or resolutions of tax audits. A reconciliation of our income tax provision to the statutory federal tax rate is as follows:

	2011		2010		2009
Statutory federal tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal taxes	0.7		1.0		1.0
Resolution of uncertain tax positions	(1.7)		(0.6)		(4.5)
Tax rate differential for international jurisdictions and other
international related tax items	(14.4)		(12.2)		(17.5)
U.S. tax credits	(2.8)		(3.3)		(3.1)
Changes in valuation allowance	0.0		(0.6)		-
International reorganization of acquired companies	0.0		3.2		4.4
Permanent items	2.5		2.5		4.2
Other	0.4		(0.5)		(1.1)
	19.7	%	24.5	%	18.4	%

Substantially all the tax rate differential for international jurisdictions was driven by earnings of our Irish subsidiaries.

In 2010, a reorganization of international operations was effected which included the transfer of certain assets of Isilon, Archer Technologies and Bus-Tech into the single EMC international holding company, which negatively impacted the rate by 3.2 percentage points.

In 2009, we effected a plan to reorganize our international operations by transferring certain assets of our RSA and Data Domain entities and legacy foreign corporations owned directly by EMC into a single EMC international holding company. As a result of this reorganization, we incurred income taxes which negatively impacted the rate by 4.4 percentage points.

The components of the current and noncurrent deferred tax assets and liabilities are as follows (table in thousands):

	December 31, 2011				December 31, 2010
	Deferred Tax		Deferred Tax		Deferred Tax		Deferred Tax
	Asset		Liability		Asset		Liability
Current:
Accounts and notes receivable	$	86,400	$	—	$	49,636	$	—
Inventory		91,374		—		80,500		—
Accrued expenses		281,071		—		254,775		—
Deferred revenue		274,463		—		224,921		—
Total current		733,308		—		609,832		—
Noncurrent:
Property, plant and equipment, net		—		(246,377)		—		(102,962)
Intangible and other assets, net		—		(609,813)		—		(633,225)
Equity		—		(38,616)		—		(156,802)
Deferred revenue		—		(10,992)		—		(22,313)
Other noncurrent liabilities		—		(55,938)		—		(47,526)
Credit carryforwards		72,933		—		44,248		—
Net operating losses		156,541		—		157,541		—
Other comprehensive loss		134,157		—		48,385		—
Total noncurrent		363,631		(961,736)		250,174		(962,828)
Gross deferred tax assets and liabilities		1,096,939		(961,736)		860,006		(962,828)
Valuation allowance		(5,293)		—		(4,350)		—
Total deferred tax assets and liabilities	$	1,091,646	$	(961,736)	$	855,656	$	(962,828)

We have gross federal and foreign net operating loss carryforwards of $279.0 million and $86.5 million, respectively. Portions of these carryforwards are subject to annual limitations, including Section 382 of the Internal Revenue Code of 1986 (“Code”), as amended, for U.S. tax purposes and similar provisions under other countries' tax laws. Certain of these net operating losses will begin to expire in 2014, while others have an unlimited carryforward period.

We have federal and state credit carryforwards of $22.6 million and $46.1 million, respectively. Portions of these carryforwards are subject to annual limitations, including Section 382 of the Code, as amended, for U.S. tax purposes and similar provisions under other countries' tax laws. Certain of these credits will begin to expire in 2012, while others have an unlimited carryforward period.

The valuation allowance increased from $4.4 million at December 31, 2010 to $5.3 million at December 31, 2011. The increase was attributable to acertain subsidiary's foreign tax credit carryforward. The valuation allowance relates to foreign net operating loss carryforwards.

Deferred income taxes have not been provided on basis differences related to investments in foreign subsidiaries. These basis differences were approximately $6.4 billion and $5.1 billion at December 31, 2011 and 2010, respectively, and consisted primarily of undistributed earnings permanently invested in these entities. The change in the basis difference in 2011 was mainly attributable to income earned in the current year. At December 31, 2011, our total cash, cash equivalents, and short-term and long-term investments were $10.8 billion. This balance includes approximately $4.5 billion held by VMware, of which $2.1 billion is held overseas, and $1.5 billion held by EMC in overseas entities. If these overseas funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. 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 2011, 2010 and 2009 was $1.8 billion, $1.2 billion and $0.9 billion, respectively. Income before income taxes from domestic operations for 2011, 2010 and 2009 was $1.5 billion, $1.4 billion and $0.5 billion, respectively.

The following is a rollforward of our gross consolidated liability for unrecognized income tax benefits for the three years ended December 31:

	2011		2010		2009
Unrecognized tax benefits, beginning of year	$	230.3	$	197.1	$	218.5
Tax positions related to current year:
Additions		42.0		47.6		52.1
Reductions		(1.8)		-		-
Tax positions related to prior years:
Additions		14.0		23.7		4.6
Reductions		(71.0)		(20.2)		(66.7)
Settlements		(3.3)		(5.0)		(2.9)
Lapses in statutes of limitations		(13.4)		(12.9)		(8.5)
Unrecognized tax benefits, end of year	$	196.8	$	230.3	$	197.1

As of December 31, 2011, 2010 and 2009, $192.3 million, $221.8 million and $195.1 million, respectively, of the unrecognized tax benefits, if recognized, would have been recorded as a reduction to income tax expense. The remainder would be an adjustment to shareholders' equity.

We have substantially concluded all U.S. federal income tax matters for years through 2008. We also have income tax audits in process in numerous state, local and international jurisdictions. In our international jurisdictions that comprise a significant portion of our operations, the years that may be examined vary, with the earliest year being 2002. Based on the timing and outcome of examinations of EMC, the result of the expiration of statutes of limitations for specific jurisdictions or the timing and result of ruling requests from taxing authorities, it is reasonably possible that up to $14.8 million of unrecognized tax positions may be recognized within one year.

The $71.0 million reduction during 2011 for tax positions related to prior years is principally due to the resolution of certain transfer pricing matters, inclusive of the completion of audits in certain foreign jurisdications and the completion of the 2007 and 2008 U.S. federal income tax audits. The $66.7 million reduction during 2009 for tax positions related to prior years is principally due to the resolution of certain transfer pricing matters and the completion of the 2005 and 2006 U.S. federal income tax audits.

We recognize interest expense and penalties related to income tax matters in income tax expense. For 2011 and 2010, $1.2 million and $1.1 million, respectively, in interest expense was recognized, whereas for 2009, $4.3 million in interest expense was reversed. In addition to the unrecognized tax benefits noted above, the balance of the accrued interest and penalties were $31.6 million, $30.5 million and $29.9 million as of December 31, 2011, 2010 and 2009, respectively.