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 24.0 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 $823 million (22.7 percent effective tax rate) and $992 million (26.1 percent effective tax rate) during the three months ended June 29, 2012, and July 1, 2011, respectively. The Company recorded income tax expense of $1,481 million (23.3 percent effective tax rate) and $1,592 million (25.2 percent effective tax rate) during the six months ended June 29, 2012, and July 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):
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Three Months Ended |
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Six Months Ended |
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June 29,
2012 |
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July 1,
2011 |
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June 29,
2012 |
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July 1,
2011 |
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Asset impairments |
$ |
— |
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$ |
(15 |
) |
8 |
$ |
— |
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$ |
(15 |
) |
8 |
Productivity and reinvestment program |
(20 |
) |
1 |
— |
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|
(44 |
) |
1 |
— |
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Other productivity, integration and restructuring initiatives |
1 |
|
2 |
(34 |
) |
9 |
1 |
|
2 |
(86 |
) |
9 |
Transaction gains and losses |
33 |
|
3 |
172 |
|
10 |
33 |
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3 |
208 |
|
13 |
Certain tax matters |
(25 |
) |
4 |
16 |
|
11 |
(33 |
) |
6 |
19 |
|
11 |
Other — net |
(7 |
) |
5 |
(1 |
) |
12 |
(14 |
) |
7 |
(38 |
) |
14 |
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1 |
Related to charges of $54 million and $118 million during the three and six months ended June 29, 2012, respectively. These charges were due to the Company's productivity and reinvestment program announced in February 2012. Refer to Note 10 and Note 11.
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2 |
Related to charges of $13 million and $27 million during the three and six months ended June 29, 2012, respectively. These charges were primarily due to the Company's other restructuring initiatives that are outside the scope of the Company's productivity and reinvestment program announced in February 2012. Refer to Note 10 and Note 11.
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3 |
Related to a gain of $92 million the Company realized as a result of Coca-Cola FEMSA, an equity method investee, issuing additional shares of its own stock during the period at a per share amount greater than the carrying amount of the Company's per share investment. Refer to Note 10.
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4 |
Related to a net tax benefit primarily associated with the reversal of a valuation allowance in one of the Company's foreign jurisdictions as well as amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties. See below for additional details related to the change in the Company's uncertain tax positions. |
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5 |
Related to a charge of $18 million that consisted of a net charge of $1 million due to our proportionate share of restructuring charges and a transaction gain recorded by certain of our equity method investees; charges of $11 million associated with changes in the structure of BPW; and charges of $6 million associated with the Company's orange juice supply in the United States. Refer to Note 10.
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6 |
Related to a net tax benefit primarily associated with the reversal of valuation allowances in the Company's foreign 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 the change in the Company's uncertain tax positions. |
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7 |
Related to a net charge of $3 million. This net charge is primarily due to a net gain of $43 million related to our proportionate share of transaction gains 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 $14 million associated with changes in the structure of BPW; and charges of $12 million associated with the Company's orange juice supply in the United States. Refer to Note 10.
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8 |
Related to a $38 million charge due to the impairment of an entity accounted for under the equity method of accounting. Refer to Note 10.
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9 |
Related to charges of $121 million and $283 million during the three and six months ended July 1, 2011, 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.
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10 |
Related to a net gain of $391 million, primarily due to the gain on the merger of Arca and Contal, partially offset by costs associated with the merger. Refer to Note 10.
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11 |
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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12 |
Related to a net charge of $4 million, primarily due to charges related to the earthquake and tsunami that devastated northern and eastern Japan; our proportionate share of restructuring charges recorded by an equity method investee; and a net gain on the repurchase of certain long-term debt we assumed in connection with our acquisition of CCE's former North America business. Refer to Note 10.
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13 |
Related to a net gain of $493 million, primarily due to the gain on the merger of Arca and Contal and the gain on the sale of our investment in Embonor, partially offset by costs associated with the merger of Arca and Contal. Refer to Note 10.
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14 |
Related to a net charge of $111 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 a net expense on the repurchase of certain long-term debt we assumed in connection with the CCE transaction. Refer to Note 10.
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During the six months ended June 29, 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 for the six months ended June 29, 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 June 29, 2012, the gross amount of unrecognized tax benefits was $373 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 $236 million, exclusive of any benefits related to interest and penalties. The remaining $137 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 six months ended June 29, 2012, is as follows (in millions):
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Balance of unrecognized tax benefits as of December 31, 2011 |
$ |
320 |
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Increase related to prior period tax positions |
66 |
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Increase related to current period tax positions |
13 |
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Decrease as a result of a lapse of the applicable statute of limitations |
(7 |
) |
Decrease from effects of foreign currency exchange rates |
(19 |
) |
Balance of unrecognized tax benefits as of June 29, 2012 |
$ |
373 |
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The Company had $135 million and $110 million in interest and penalties related to unrecognized tax benefits accrued as of June 29, 2012, and December 31, 2011, respectively. The change in the accrued interest and penalties related to unrecognized tax benefits did not have a material impact on the Company's condensed consolidated statements of income during the three and six months ended June 29, 2012.
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 six months ended June 29, 2012, the Company changed its judgment on the realizability of certain deferred tax assets. As a result of considering recent significant positive evidence, including, among other things, a consistent pattern of positive earnings in the past three years as well as the future forecast, it was determined that a valuation allowance was no longer required for certain deferred tax assets primarily recorded on net operating losses in foreign jurisdictions. The decrease in these valuation allowances resulted in a tax benefit of $20 million and $153 million during the three and six months ended June 29, 2012, respectively. Furthermore, the Company currently believes it is reasonably possible that $125 million to $175 million of valuation allowances related to net operating losses in certain foreign jurisdictions may be reversed within the next 12 months.