| Income Taxes |
INCOME TAXES
Our effective tax rate reflects the benefits of having significant operations outside the United States, which are generally taxed at rates lower than the U.S. statutory rate of 35 percent. As a result of employment actions and capital investments made by the Company, certain tax jurisdictions provide income tax incentive grants, including Brazil, Costa Rica, Singapore and Swaziland. The terms of these grants expire from 2016 to 2023. We anticipate that we will be able to extend or renew the grants in these locations. In addition, our effective tax rate reflects the benefits of having significant earnings generated in investments accounted for under the equity method of accounting, which are generally taxed at rates lower than the U.S. statutory rate.
At the end of each interim period, we make our best estimate of the effective tax rate expected to be applicable for the full fiscal year. This estimate reflects, among other items, our best estimate of operating results and foreign currency exchange rates. Based on current tax laws, the Company's estimated effective tax rate for 2016 is 22.5 percent. However, in arriving at this estimate we do not include the estimated impact of unusual and/or infrequent items, which may cause significant variations in the customary relationship between income tax expense and income before income taxes.
On September 17, 2015, the Company received a Statutory Notice of Deficiency from the IRS for the tax years 2007 through 2009, after a five-year audit. Refer to Note 7.
The Company recorded income tax expense of $839 million (19.5 percent effective tax rate) and $1,250 million (28.7 percent effective tax rate) during the three months ended July 1, 2016 and July 3, 2015, respectively. The Company recorded income tax expense of $1,240 million (20.0 percent effective tax rate) and $1,665 million (26.3 percent effective tax rate) during the six months ended July 1, 2016 and July 3, 2015, respectively.
As of July 1, 2016, the gross amount of unrecognized tax benefits was $341 million. If the Company were to prevail on all uncertain tax positions, the net effect would be a benefit to the Company's effective tax rate of $182 million, exclusive of any benefits related to interest and penalties. The remaining $159 million, which was recorded as a deferred tax asset, primarily represents tax benefits that would be received in different tax jurisdictions in the event the Company did not prevail on all uncertain tax positions.
A reconciliation of the changes in the gross amount of unrecognized tax benefits is as follows (in millions):
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Six Months Ended July 1, 2016 |
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Beginning balance of unrecognized tax benefits |
$ |
168 |
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Increase related to prior period tax positions |
161 |
|
1 |
Increase related to current period tax positions |
14 |
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Decrease related to settlements with taxing authorities |
(1 |
) |
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Increase (decrease) due to effect of foreign currency exchange rate changes |
(1 |
) |
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Ending balance of unrecognized tax benefits |
$ |
341 |
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1 |
The increase is primarily related to a change in judgment about one of the Company’s tax positions as a result of receiving notification of a preliminary settlement of a Competent Authority matter with a foreign jurisdiction. This change in position did not have a material impact on the Company's condensed consolidated statement of income during the three and six months ended July 1, 2016, as it was partially offset by refunds to be received from the foreign jurisdiction. |
The following table illustrates the income tax expense (benefit) associated with unusual and/or infrequent items for the interim periods presented (in millions):
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Three Months Ended |
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Six Months Ended |
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July 1, 2016 |
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July 3, 2015 |
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July 1, 2016 |
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July 3, 2015 |
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Productivity and reinvestment program |
$ |
(24 |
) |
1 |
$ |
(33 |
) |
8 |
$ |
(45 |
) |
1 |
$ |
(75 |
) |
8 |
Other productivity, integration and restructuring initiatives |
— |
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2 |
— |
|
9 |
— |
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2 |
— |
|
9 |
Transaction gains and losses |
26 |
|
3 |
474 |
|
10 |
(117 |
) |
4 |
464 |
|
11 |
Certain tax matters |
83 |
|
5 |
16 |
|
12 |
77 |
|
5 |
— |
|
12 |
Other — net |
(45 |
) |
6 |
(38 |
) |
13 |
(46 |
) |
7 |
(168 |
) |
14 |
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1 |
Related to charges of $65 million and $128 million during the three and six months ended July 1, 2016, respectively. These charges were due to the Company's productivity and reinvestment program. Refer to Note 10 and Note 11.
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2 |
Related to charges of $41 million and $240 million during the three and six months ended July 1, 2016, respectively. These charges were due to the integration of our German bottling operations. Refer to Note 10 and Note 11.
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3 |
Related to a net gain of $1,040 million that primarily consisted of a $1,292 million net noncash gain related to the deconsolidation of our German bottling operations, partially offset by charges of $251 million related to $199 million of noncash losses due to the refranchising of territories in North America and $52 million related to costs incurred to refranchise our North America bottling territories. Refer to Note 2 and Note 10.
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4 |
Related to a net gain of $643 million that primarily consisted of a $1,292 million net noncash gain related to the deconsolidation of our German bottling operations and an $18 million gain related to the disposal of our investment in Keurig. These gains were partially offset by charges of $665 million related to $568 million of noncash losses due to the refranchising of territories in North America and $97 million related to costs incurred to refranchise our North America bottling territories. Refer to Note 2 and Note 10.
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5 |
Primarily related to amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties. |
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6 |
Related to charges of $125 million that included a $100 million cash contribution to The Coca-Cola Foundation, an $18 million charge due to our proportionate share of unusual or infrequent items recorded by certain of our equity method investees and a $7 million charge due to tax litigation expense. Refer to Note 10.
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7 |
Related to charges of $131 million that included a $100 million cash contribution to The Coca-Cola Foundation, a $21 million charge due to our proportionate share of unusual or infrequent items recorded by certain of our equity method investees and a $10 million charge due to tax litigation expense. Refer to Note 10.
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8 |
Related to charges of $92 million and $182 million during the three and six months ended July 3, 2015, respectively. These charges were due to the Company's productivity and reinvestment program. Refer to Note 10 and Note 11.
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9 |
Related to charges of $94 million and $129 million during the three and six months ended July 3, 2015, respectively. These charges were due to the integration of our German bottling operations. Refer to Note 10 and Note 11.
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10 |
Related to a net gain of $1,007 million that primarily consisted of a $1,402 million net gain related to the Monster Transaction, partially offset by a $380 million charge due to the impairment of certain trademark assets and $12 million of charges due to the refranchising of territories in North America. Refer to Note 2 and Note 10.
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11 |
Related to a net gain of $961 million that primarily consisted of a $1,402 million net gain related to the Monster Transaction, partially offset by a $380 million charge due to the impairment of certain trademark assets, $33 million of charges due to the refranchising of territories in North America, a $6 million additional charge related to the sale of a portion of our equity investment in a Brazilian bottling entity, and a $19 million charge related to the remeasurement of our equity interest in a South African bottler to fair value. Refer to Note 2 and Note 10.
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12 |
Primarily related to the settlement of certain prior year audit matters and amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties. The components of the net change in uncertain tax positions were individually insignificant. |
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13 |
Related to charges of $110 million that primarily included a $100 million cash contribution to The Coca-Cola Foundation and a $9 million charge due to our proportionate share of unusual or infrequent items recorded by certain of our equity method investees. Refer to Note 10.
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14 |
Related to charges of $638 million that primarily consisted of a $100 million cash contribution to The Coca-Cola Foundation, $320 million associated with the early extinguishment of long-term debt, $27 million due to the remeasurement of the net monetary assets of our Venezeulan subsidiary into U.S. dollars using the SIMADI exchange rate, $108 million due to the write-down we recorded related to receivables from our bottling partner in Venezuela and an impairment of a Venezuelan trademark, and $82 million due to our proportionate share of unusual or infrequent items recorded by certain of our equity method investees. Refer to Note 1 and Note 10.
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The Company evaluates the recoverability of our deferred tax assets in accordance with U.S. GAAP. We perform our recoverability tests on a quarterly basis, or more frequently, to determine whether it is more likely than not that any of our deferred tax assets will not be realized within their life cycle based on the available evidence. The Company's deferred tax valuation allowances are primarily a result of uncertainties regarding the future realization of recorded tax benefits on tax loss carryforwards from operations in various jurisdictions.
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