| Income Taxes |
INCOME TAXES
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 effective tax rate in 2018 is expected to be 21.0 percent before considering the potential impact of further clarification of certain matters related to the Tax Reform Act and any unusual or special items that may affect our effective tax rate.
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 8.
The Company recorded income tax expense on income from continuing operations of $594 million (20.6 percent effective tax rate) and $1,252 million (47.7 percent effective tax rate) during the three months ended June 29, 2018 and June 30, 2017, respectively. The Company recorded income tax expense on income from continuing operations of $1,100 million (23.3 percent effective tax rate) and $1,575 million (38.1 percent effective tax rate) during the six months ended June 29, 2018 and June 30, 2017, respectively. During the three and six months ended June 29, 2018, the Company recorded income tax expense on income from discontinued operations of $16 million (27.7 percent effective tax rate) and $56 million (32.7 percent effective tax rate), respectively.
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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Six Months Ended |
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June 29,
2018 |
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June 30,
2017 |
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June 29,
2018 |
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June 30,
2017 |
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Asset impairments |
$ |
(16 |
) |
1 |
$ |
(164 |
) |
9 |
$ |
(116 |
) |
1 |
$ |
(164 |
) |
9 |
Productivity and reinvestment program |
(34 |
) |
2 |
(31 |
) |
10 |
(57 |
) |
2 |
(83 |
) |
10 |
Transaction gains and losses |
(16 |
) |
3 |
707 |
|
11 |
(33 |
) |
4 |
533 |
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12 |
Certain tax matters |
(37 |
) |
5 |
(40 |
) |
13 |
89 |
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6 |
(70 |
) |
13 |
Other — net |
3 |
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7 |
(12 |
) |
14 |
(15 |
) |
8 |
(29 |
) |
15 |
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1 |
Related to charges of $112 million and $502 million during the three and six months ended June 29, 2018, respectively, due to impairments of certain of the Company's assets. Refer to Note 11 and Note 15.
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2 |
Related to charges of $111 million and $206 million during the three and six months ended June 29, 2018, respectively, due to the Company's productivity and reinvestment program. Also related to pension settlement charges of $39 million during the three and six months ended June 29, 2018. Refer to Note 11, Note 12 and Note 13.
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3 |
Related to charges of $152 million, which included pretax charges of $47 million related to pension settlements, charges of $34 million related to costs incurred to refranchise certain of our bottling operations, charges of $2 million related to payments made to convert the bottling agreements for certain North America bottling partners' territories to a single form of CBA with additional requirements and net charges of $102 million as a result of the refranchising of certain bottling territories in North America, partially offset by a net gain of $36 million related to the refranchising of our Latin American bottling operations. Refer to Note 2, Note 11 and Note 13.
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4 |
Related to charges of $251 million, which included pretax charges of $79 million related to costs incurred to refranchise certain of our bottling operations, charges of $47 million related to pension settlements, charges of $33 million primarily related to the reversal of the cumulative translation adjustments resulting from the substantial liquidation of the Company's former Russian juice operations, charges of $21 million related to payments made to convert the bottling agreements for certain North America bottling partners' territories to a single form of CBA with additional requirements and net charges of $104 million as a result of the refranchising of certain bottling territories in North America, partially offset by a net gain of $36 million related to the refranchising of our Latin American bottling operations. Refer to Note 2, Note 11 and Note 13.
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5 |
Related to $42 million of income tax benefit primarily as a result of adjustments to our provisional remeasurement of deferred taxes recorded as of December 31, 2017, related to the Tax Reform Act signed into law on December 22, 2017. The Company also recorded $3 million of excess tax benefits recorded in association with the Company's share-based compensation arrangements. These tax benefits were partially offset by a net tax charge of $8 million for changes to our uncertain tax positions, including interest and penalties, as well as for agreed upon tax matters.
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6 |
Related to $134 million of income tax expense primarily as a result of adjustments to our provisional remeasurement of deferred taxes recorded as of December 31, 2017, related to the Tax Reform Act signed into law on December 22, 2017. The Company also recorded a net tax charge of $42 million for changes to our uncertain tax positions, including interest and penalties, as well as for agreed upon tax matters. These charges were partially offset by $87 million of excess tax benefits recorded in association with the Company's share-based compensation arrangements.
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7 |
Related to charges of $14 million, which primarily consisted of a net charge of $33 million due to our proportionate share of unusual or infrequent items recorded by certain of our equity method investees and a charge of $22 million due to tax litigation expense, partially offset by a gain of $36 million related to realized and unrealized gains and losses on equity securities and trading debt securities as well as realized gains and losses on available-for-sale debt securities. Refer to Note 11.
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8 |
Related to charges of $156 million, which primarily consisted of a net charge of $84 million due to our proportionate share of unusual or infrequent items recorded by certain of our equity method investees, a net loss of $49 million related to realized and unrealized gains and losses on equity securities and trading debt securities as well as realized gains and losses on available-for-sale debt securities and a charge of $27 million due to tax litigation expense. Refer to Note 11.
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9 |
Related to charges of $667 million and $771 million during the three and six months ended June 30, 2017, respectively, due to the impairment of certain assets. Refer to Note 11 and Note 15.
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10 |
Related to charges of $87 million and $226 million during the three and six months ended June 30, 2017, respectively. These charges were due to the Company's productivity and reinvestment program. Refer to Note 12.
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11 |
Related to a net gain of $82 million, which primarily consisted of a $445 million gain related to the merger of CCW and CCEJ, a $25 million gain related to Coca-Cola FEMSA, an equity method investee, issuing additional shares of its stock and a $9 million gain related to refranchising a substantial portion of our China bottling operations. These gains were partially offset by a net charge of $214 million as a result of the refranchising of certain bottling territories in North America, charges of $109 million primarily related to payments made to convert the bottling agreements for certain North America bottling partners' territories to a single form of CBA with additional requirements, a charge of $44 million related to costs incurred to refranchise certain of our bottling operations and a charge of $26 million related to our former German bottling operations. Refer to Note 2 and Note 11.
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12 |
Related to charges of $583 million, which primarily consisted of $711 million of net charges as a result of the refranchising of certain bottling territories in North America, charges of $215 million primarily related to payments made to convert the bottling agreements for certain North America bottling partners' territories to a single form of CBA with additional requirements, $101 million related to costs incurred to refranchise certain of our bottling operations and a charge of $26 million related to our former German bottling operations. These charges were partially offset by a $445 million gain related to the merger of CCW and CCEJ, a $25 million gain related to Coca‑Cola FEMSA, an equity method investee, issuing additional shares of its stock and a $9 million gain related to refranchising a substantial portion of our China bottling operations. Refer to Note 2 and Note 11.
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13 |
Related to $29 million and $82 million of excess tax benefits associated with the Company's share-based compensation arrangements during the three and six months ended June 30, 2017, respectively, and the tax benefit associated with the reversal of valuation allowances in certain of the Company's foreign jurisdictions, both of which were partially offset by 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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14 |
Related to charges of $22 million, which primarily consisted of a $38 million net charge related to the extinguishment of long-term debt and $19 million due to tax litigation expense, partially offset by a $37 million net gain due to our proportionate share of unusual or infrequent items recorded by certain of our equity method investees. Refer to Note 11.
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15 |
Related to charges of $86 million, which primarily consisted of a $38 million net charge related to the extinguishment of long-term debt, $25 million due to tax litigation expense and a $21 million net charge due to our proportionate share of unusual or infrequent items recorded by certain of our equity method investees. Refer to Note 11.
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In October 2016, the FASB issued ASU 2016-16, which requires the Company to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 was effective for the Company beginning January 1, 2018 and was adopted using a modified retrospective basis. We recorded a $2.9 billion cumulative effect adjustment to increase the opening balance of reinvested earnings with the majority of the offset being recorded as a deferred tax asset. This amount is primarily related to trademarks and other intangible assets and was recorded as a deferred tax asset in the line item deferred income tax assets in our condensed consolidated balance sheet.
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 asset valuation allowances are primarily the result of uncertainties regarding the future realization of recorded tax benefits on tax loss carryforwards from operations in various jurisdictions.
The Tax Reform Act was signed into law on December 22, 2017. Among other things, the Tax Reform Act reduces the U.S. federal corporate tax rate from 35.0 percent to 21.0 percent effective for tax years beginning after December 31, 2017, transitions the U.S. method of taxation from a worldwide tax system to a modified territorial system and requires companies to pay a one-time transition tax over a period of eight years on the mandatory deemed repatriation of prescribed foreign earnings as of December 31, 2017. We are applying the guidance in the U.S. Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 118 ("SAB 118") when accounting for the enactment date effects of the Tax Reform Act. As of June 29, 2018, we have not completed our accounting for the tax effects of the Tax Reform Act; however, in certain cases, we have made a reasonable estimate of the effects of the Tax Reform Act. In other cases, we have not been able to make a reasonable estimate and continue to account for those items under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment of the Tax Reform Act. In all cases, we will continue to make and refine our calculations as additional analysis is completed. Our estimates may also be affected as we gain a more thorough understanding of the Tax Reform Act. These changes could be material to income tax expense.
The one-time transition tax is based on our total accumulated post-1986 prescribed foreign earnings and profits ("E&P") estimated to be approximately $42 billion, the majority of which was previously considered to be indefinitely reinvested and, accordingly, no U.S. federal and state income taxes had been provided. We have not made any adjustments as of June 29, 2018 to either our reasonable estimate of $4.6 billion originally recorded as a provisional tax amount for our one-time transition tax liability or the reasonable estimate of $0.6 billion provisional deferred tax for the related withholding taxes and state income taxes. Because of the complexities of the Tax Reform Act, we are still finalizing our calculation of the total accumulated post-1986 prescribed E&P for the applicable foreign entities. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 prescribed foreign E&P and finalize the amounts held in cash or other specified assets. No additional income taxes have been provided for any additional outside basis differences inherent in these entities, as these amounts, as of June 29, 2018, continue to be provisionally indefinitely reinvested. Determining the amount of unrecognized deferred tax liability related to any additional outside basis differences in these entities (i.e., basis differences in excess of that subject to the one-time transition tax) is not practicable.
We also remeasured and adjusted certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21.0 percent. However, as of June 29, 2018, we are still analyzing certain aspects of the Tax Reform Act and refining our calculations, which could affect the measurement of these balances or give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement and adjustments of our deferred tax balance was a tax benefit of $1.6 billion. Upon further analyses of certain aspects of the Tax Reform Act and refinement of our calculations during the three months ended June 29, 2018, we reduced our provisional amount by $42 million (a 1.5 percentage point decrease to our effective tax rate), which resulted in a net increase in our provisional amount of $134 million (a 2.8 percentage point increase to our effective tax rate) during the six months ended June 29, 2018. These adjustments are included as a component of income taxes from continuing operations. We do not consider the accounting for the enactment-date remeasurement of deferred tax assets and liabilities to be complete.
The Global Intangible Low-Taxed Income ("GILTI") provisions of the Tax Reform Act require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. As of June 29, 2018, because we are still evaluating the GILTI provisions and our analysis of future taxable income that is subject to GILTI, we have included GILTI related to current year operations only in our estimated annual effective tax rate and have not provided additional GILTI on deferred items. The Company has not yet elected an accounting policy related to how it will account for GILTI and therefore has not provided any deferred tax impacts of GILTI in its condensed consolidated financial statements for the three and six months ended June 29, 2018.
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