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 20.3 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 taxes from continuing operations of $528 million (18.5 percent effective tax rate) and $230 million (13.7 percent effective tax rate) during the three months ended September 28, 2018 and September 29, 2017, respectively. The Company recorded income taxes from continuing operations of $1,628 million (21.5 percent effective tax rate) and $1,805 million (31.1 percent effective tax rate) during the nine months ended September 28, 2018 and September 29, 2017, respectively. During the three and nine months ended September 28, 2018, the Company recorded income taxes from discontinued operations of $26 million (negative 5.6 percent effective tax rate) and $82 million (negative 27.2 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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Nine Months Ended |
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September 28,
2018 |
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September 29,
2017 |
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September 28,
2018 |
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September 29,
2017 |
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Asset impairments |
$ |
— |
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1 |
$ |
— |
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9 |
$ |
(116 |
) |
1 |
$ |
(164 |
) |
9 |
Productivity and reinvestment program |
(33 |
) |
2 |
(44 |
) |
10 |
(90 |
) |
2 |
(127 |
) |
10 |
Transaction gains and losses |
107 |
|
3 |
(361 |
) |
11 |
74 |
|
4 |
172 |
|
12 |
Certain tax matters |
(149 |
) |
5 |
(40 |
) |
13 |
(60 |
) |
6 |
(110 |
) |
14 |
Other — net |
27 |
|
7 |
(12 |
) |
15 |
12 |
|
8 |
(41 |
) |
16 |
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1 |
Related to charges of $205 million and $257 million during the three and nine months ended September 28, 2018, respectively, due to other-than-temporary impairments of certain of our equity method investees and charges of $450 million during the nine months ended September 28, 2018 due to impairments of certain CCR assets. Refer to Note 11 and Note 15.
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2 |
Related to charges of $107 million and $313 million during the three and nine months ended September 28, 2018, respectively, due to the Company's productivity and reinvestment program. Also related to pension settlement charges of $35 million and $74 million during the three and nine months ended September 28, 2018, respectively. Refer to Note 11, Note 12 and Note 13.
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3 |
Related primarily to a net gain of $370 million on the sale of our equity ownership in Lindley and a gain of $11 million related to the refranchising of our Latin American bottling operations partially offset by net charges of $275 million as a result of the refranchising of certain bottling territories in North America, charges of $38 million related to costs incurred to refranchise certain of our North America bottling operations and charges of $12 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. Refer to Note 2 and Note 11.
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4 |
Related primarily to net charges of $379 million as a result of the refranchising of certain bottling territories in North America, charges of $117 million related to costs incurred to refranchise certain of our North America 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 and charges of $33 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. These charges were partially offset by a $370 million net gain related to the sale of our equity ownership in Lindley and a net gain of $47 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 |
Includes $125 million of income tax benefit related to tax adjustments made in accordance with U.S. Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 118 ("SAB 118") with respect to the adjustment of our original provisional estimate of the impact of the Tax Reform Act. The Company also recorded $27 million of excess tax benefits associated with the Company's share-based compensation arrangements. These tax benefits were partially offset by a net tax charge of $3 million primarily related to changes to our uncertain tax positions, including interest and penalties, as well as for agreed-upon tax matters.
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6 |
Includes $114 million of excess tax benefits associated with the Company's share-based compensation arrangements partially offset by $45 million primarily related to changes to our uncertain tax positions, including interest and penalties, as well as for agreed-upon tax matters. The Company also recorded charges of $9 million of income tax expense related to tax adjustments made in accordance with SAB 118 with respect to the adjustment of our original provisional estimate of the impact of the Tax Reform Act.
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7 |
Related to a net gain of $64 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, a net gain of $27 million related to the extinguishment of long-term debt and a net benefit of $19 million due to our proportionate share of unusual or infrequent items recorded by certain of our equity method investees, partially offset by a charge of $4 million due to tax litigation expense. Refer to Note 4, Note 7, Note 8 and Note 11.
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8 |
Related primarily to a net charge of $65 million due to our proportionate share of unusual or infrequent items recorded by certain of our equity method investees, a charge of $31 million due to tax litigation expense, partially offset by a net gain of $27 million related to the extinguishment of long-term debt and a net gain of $15 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 4, Note 7, Note 8 and Note 11.
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9 |
Related to charges of $50 million and $821 million during the three and nine months ended September 29, 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 $129 million and $355 million during the three and nine months ended September 29, 2017, respectively. These charges were due to the Company's productivity and reinvestment program. Refer to Note 12.
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11 |
Related primarily to $762 million of charges as a result of the refranchising of certain bottling territories in North America, $213 million related to costs incurred to refranchise certain of our bottling operations and $72 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. These charges were partially offset by a $79 million gain related to the refranchising of our remaining China bottling operations and related cost method investment. Refer to Note 2 and Note 11.
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12 |
Related primarily to $1,473 million of net charges as a result of the refranchising of certain bottling territories in North America, $314 million of charges related to costs incurred to refranchise certain of our bottling operations, $287 million of charges 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 and a $26 million charge 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, an $88 million gain related to the refranchising of our China bottling operations and related cost method investment and a $25 million gain related to Coca-Cola FEMSA, an equity method investee, issuing additional shares of its stock. Refer to Note 2 and Note 11.
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13 |
Related to $40 million of excess tax benefits associated with the Company's share-based compensation arrangements.
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14 |
Related to $122 million of excess tax benefits associated with the Company's share-based compensation arrangements 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.
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15 |
Related primarily to an $18 million charge related to tax litigation expense and a $16 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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16 |
Related primarily to a net charge of $38 million related to the extinguishment of long-term debt, a $43 million charge related to tax litigation expense and a net charge of $37 million 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 SAB 118 when accounting for the enactment date effects of the Tax Reform Act. As of September 28, 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. 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. During the three and nine months ended September 28, 2018, we recognized $0.2 billion of additional provisional transition tax expense. This amount was in addition to our reasonable estimate of $4.6 billion originally recorded as a provisional tax amount for our one-time transition tax liability. During the three and nine months ended September 28, 2018, we recognized a $0.2 billion benefit to our provisional deferred tax for the related withholding taxes and state income taxes. This amount was a reduction to the original 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 September 28, 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 U.S. 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 September 28, 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 September 28, 2018, we reduced our provisional amount by $11 million (a 0.4 percentage point decrease to our effective tax rate), which resulted in a net increase in our provisional amount of $123 million (a 1.6 percentage point increase to our effective tax rate) during the nine months ended September 28, 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 September 28, 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 nine months ended September 28, 2018.