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 2027. 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 significant operating and nonoperating 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 $378 million (26.5 percent effective tax rate) and $272 million (15.8 percent effective tax rate) during the three months ended September 30, 2016 and October 2, 2015, respectively. The Company recorded income tax expense of $1,618 million (21.2 percent effective tax rate) and $1,937 million (24.0 percent effective tax rate) during the nine months ended September 30, 2016 and October 2, 2015, respectively.
As of September 30, 2016, the gross amount of unrecognized tax benefits was $343 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 $183 million, exclusive of any benefits related to interest and penalties. The remaining $160 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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Nine Months Ended September 30, 2016 |
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Beginning balance of unrecognized tax benefits |
$ |
168 |
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|
Increase related to prior period tax positions |
160 |
|
1 |
Increase related to current period tax positions |
13 |
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|
Decrease related to settlements with taxing authorities |
(1 |
) |
|
Increase (decrease) due to effect of foreign currency exchange rate changes |
3 |
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|
Ending balance of unrecognized tax benefits |
$ |
343 |
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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 nine months ended September 30, 2016, as it was partially offset by refunds to be received from the foreign jurisdiction. |
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company had $148 million and $111 million in interest and penalties related to unrecognized tax benefits accrued as of September 30, 2016 and December 31, 2015, respectively. If the Company were to prevail on all uncertain tax positions, the reversal of this accrual would also be a benefit to the Company's effective tax rate.
The following table illustrates the income tax expense (benefit) associated with significant operating and nonoperating items for the interim periods presented (in millions):
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Three Months Ended |
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Nine Months Ended |
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September 30, 2016 |
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October 2, 2015 |
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September 30, 2016 |
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October 2, 2015 |
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Productivity and reinvestment program |
$ |
(20 |
) |
1 |
$ |
(49 |
) |
8 |
$ |
(65 |
) |
1 |
$ |
(124 |
) |
8 |
Other productivity, integration and restructuring initiatives |
— |
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— |
|
9 |
— |
|
2 |
— |
|
9 |
Transaction gains and losses |
(246 |
) |
3 |
(291 |
) |
10 |
(363 |
) |
4 |
173 |
|
11 |
Certain tax matters |
7 |
|
5 |
(6 |
) |
12 |
84 |
|
5 |
(6 |
) |
13 |
Other — net |
8 |
|
6 |
— |
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|
(38 |
) |
7 |
(168 |
) |
14 |
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1 |
Related to charges of $59 million and $187 million during the three and nine months ended September 30, 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 $240 million during the nine months ended September 30, 2016. 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 charge of $1,204 million that primarily consisted of charges related to $1,089 million of losses due to the refranchising of bottling territories in North America, $73 million related to costs incurred to refranchise our North America bottling territories, charges of $17 million related to payments made to convert the bottling agreements for certain North America bottling partners' territories to Final Form CBAs, a loss of $21 million related to the deconsolidation of our South African bottling operations and the $80 million tax impact resulting from the accrual of tax on temporary differences related to the investment in foreign subsidiaries that are now expected to reverse in the foreseeable future. Refer to Note 2 and Note 10.
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4 |
Related to a net charge of $561 million that primarily consisted of charges related to $1,657 million of losses due to the refranchising of bottling territories in North America, $170 million related to costs incurred to refranchise our North America bottling territories, charges of $17 million related to payments made to convert the bottling agreements for certain North America bottling partners' territories to Final Form CBAs, a loss of $21 million related to the deconsolidation of our South African bottling operations and the $80 million tax impact resulting from the accrual of tax on temporary differences related to the investment in foreign subsidiaries that are now expected to reverse in the foreseeable future. These charges are partially offset by a $1,288 million net gain related to the deconsolidation of our German bottling operations and an $18 million net gain related to the disposal of our investment in Keurig. 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. The components of the net change in uncertain tax positions were individually insignificant. |
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6 |
Related to charges of $99 million that included a $76 million charge due to the write-down we recorded related to receivables from our bottling partner in Venezuela, a $14 million charge due to our proportionate share of significant operating and nonoperating items recorded by certain of our equity method investees and a $9 million charge due to tax litigation expense. Refer to Note 10.
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7 |
Related to charges of $230 million that included a $100 million cash contribution to The Coca-Cola Foundation, a $76 million charge due to the write-down we recorded related to receivables from our bottling partner in Venezuela, a $35 million charge due to our proportionate share of significant operating and nonoperating items recorded by certain of our equity method investees and a $19 million charge due to tax litigation expense. Refer to Note 10.
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8 |
Related to charges of $141 million and $323 million during the three and nine months ended October 2, 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 $75 million and $204 million during the three and nine months ended October 2, 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 charge of $859 million that included $815 million of charges primarily due to the refranchising of bottling territories in North America and a $38 million charge due to the impairment of certain trademark assets. Refer to Note 2 and Note 10.
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11 |
Related to a net gain of $102 million that primarily consisted of a $1,402 million net gain related to the Monster Transaction, partially offset by a $418 million charge due to the impairment of certain trademark assets, $848 million of charges due to the refranchising of bottling 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 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 |
Primarily related to prior year audit settlements and amounts to be recorded for changes to our uncertain tax positions, including interest and penalties. The components of the net change in the uncertain tax positions were individually insignificant. |
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14 |
Related to charges of $639 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 Venezuelan subsidiary into U.S. dollars using the SIMADI exchange rate, $111 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 $79 million due to our proportionate share of significant operating and nonoperating 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.