Quarterly report pursuant to Section 13 or 15(d)

Income Taxes

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Income Taxes
 3 Months Ended
Mar. 30, 2012
Income taxes  
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 2015 to 2020. We expect each of these grants to be renewed indefinitely. 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 2012 is 24.8 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.
The Company recorded income tax expense of $658 million (24.1 percent effective tax rate) and $600 million (23.8 percent effective tax rate) during the three months ended March 30, 2012, and April 1, 2011, respectively. The following table illustrates the tax expense (benefit) associated with unusual and/or infrequent items for the interim periods presented (in millions):
 
Three Months Ended
 
 
March 30,
2012

 
April 1,
2011

 
Productivity and reinvestment program
$
(24
)
1 
$
—

 
Other productivity, integration and restructuring initiatives
—

 
(52
)
4 
Transaction gains and losses
—

 
36

5 
Certain tax matters
(8
)
2 
3

6 
Other — net
(7
)
3 
(37
)
7 
1 
Related to charges of $64 million due to the Company's productivity and reinvestment program announced in February 2012. Refer to Note 10 and Note 11.
2 
Related to a net tax benefit associated with the reversal of a valuation allowance in one of the Company's international jurisdictions, partially offset by amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties. See below for additional details related to a change in the Company's uncertain tax positions.
3 
Related to a net gain of $15 million. This net gain is primarily due to a net gain of $44 million related to our proportionate share of a transaction gain and restructuring charges recorded by certain of our equity method investees, partially offset by charges of $20 million associated with changes in the Company's ready-to-drink tea strategy as a result of our current U.S. license agreement with Nestlé terminating at the end of 2012; charges of $3 million associated with changes in the structure of BPW; and charges of $6 million associated with the Company detecting residues of carbendazim, a fungicide that is not registered in the United States for use on citrus products, in orange juice imported from Brazil for distribution in the United States. Refer to Note 10.
4 
Related to charges of $162 million, primarily due to our productivity, integration and restructuring initiatives. These productivity and integration initiatives were outside the scope of the Company's productivity and reinvestment program announced in February 2012. Refer to Note 10 and Note 11.
5 
Related to a net gain of $102 million due to the sale of our investment in Embonor. Refer to Note 2 and Note 10.
6 
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.
7 
Related to a net charge of $107 million, primarily due to charges related to the earthquake and tsunami that devastated northern and eastern Japan; the amortization of favorable supply contracts acquired in connection with our acquisition of CCE's former North America business; our proportionate share of restructuring charges recorded by an equity method investee; and charges related to the repurchase of certain long-term debt. Refer to Note 10.
During the three months ended March 30, 2012, the Company made a change in judgment about one of its tax positions as a result of an adverse court decision. The Company concluded that because of the court decision, the tax position had become uncertain and the tax benefits associated with the position could not be recognized for financial statement purposes. The litigation did not have a material impact on the Company's condensed consolidated statement of income during the three months ended March 30, 2012. However, as a result of this litigation, there has been a change in the balance of our unrecognized tax benefits, which is described further below.
As of March 30, 2012, the gross amount of unrecognized tax benefits was $379 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 $232 million, exclusive of any benefits related to interest and penalties. The remaining $147 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 balance of unrecognized tax benefits during the three months ended March 30, 2012, is as follows (in millions):
Balance of unrecognized tax benefits as of December 31, 2011
$
320

Increase related to prior period tax positions
52

Increase related to current period tax positions
3

Decrease as a result of a lapse of the applicable statute of limitations
(4
)
Increase from effects of foreign currency exchange rates
8

Balance of unrecognized tax benefits as of March 30, 2012
$
379


The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company had $141 million and $110 million in interest and penalties related to unrecognized tax benefits accrued as of March 30, 2012, and December 31, 2011, respectively.
It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however, we do not expect the change to have a significant impact on our condensed consolidated statements of income or condensed consolidated balance sheets. The change may be the result of settlements of ongoing audits, statutes of limitations expiring or final settlements in matters that are the subject of litigation. At this time, an estimate of the range of the reasonably possible outcomes cannot be made.
The Company evaluates the recoverability of our deferred tax assets in accordance with accounting principles generally accepted in the United States. 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.
During the three months ended March 30, 2012, the Company made a change in judgment about the realizability of certain deferred tax assets. As a result of considering recent significant positive evidence including the future outlook and the consistent pattern of positive earnings in the past three years, it was determined that a valuation allowance was no longer required for the deferred tax assets recorded on net operating losses in a foreign jurisdiction. The decrease in this valuation allowance resulted in a tax benefit of $133 million. Furthermore, the Company currently believes it is reasonably possible that $125 million to $175 million of valuation allowances may be reversed within the next 12 months related to net operating losses in certain foreign jurisdictions.