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 $755 million (24.5 percent effective tax rate) and $681 million (23.3 percent effective tax rate) during the three months ended September 28, 2012, and September 30, 2011, respectively. The Company recorded income tax expense of $2,236 million (23.7 percent effective tax rate) and $2,273 million (24.6 percent effective tax rate) during the nine months ended September 28, 2012, and September 30, 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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Nine Months Ended |
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September 28,
2012 |
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September 30,
2011 |
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September 28,
2012 |
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September 30,
2011 |
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Asset impairments |
$ |
— |
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$ |
— |
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8 |
$ |
— |
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$ |
(15 |
) |
8 |
Productivity and reinvestment program |
(21 |
) |
1 |
— |
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|
(65 |
) |
1 |
— |
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Other productivity, integration and restructuring initiatives |
4 |
|
2 |
(25 |
) |
9 |
5 |
|
2 |
(111 |
) |
9 |
Transaction gains and losses |
— |
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|
(5 |
) |
10 |
33 |
|
5 |
203 |
|
13 |
Certain tax matters |
7 |
|
3 |
(4 |
) |
11 |
(26 |
) |
6 |
15 |
|
11 |
Other — net |
(4 |
) |
4 |
(6 |
) |
12 |
(18 |
) |
7 |
(44 |
) |
14 |
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1 |
Related to charges of $59 million and $177 million during the three and nine months ended September 28, 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 net charges of $3 million and $30 million during the three and nine months ended September 28, 2012, respectively. These charges were primarily due to the Company's other productivity, restructuring and integration 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 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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4 |
Related to a charge of $19 million that consisted of a charge of $10 million due to our proportionate share of unusual or infrequent items recorded by certain of our equity method investees and charges of $9 million associated with the Company's orange juice supply in the United States. Refer to Note 10.
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5 |
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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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 $22 million. This net charge is due to charges of $20 million associated with changes in the Company's ready-to-drink tea strategy in the United States, charges of $14 million associated with changes in the structure of BPW, and charges of $21 million associated with the Company's orange juice supply in the United States, partially offset by a net gain of $33 million related to our proportionate share of unusual or infrequent items recorded by certain of our equity method investees. Refer to Note 10.
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8 |
Related to charges of $3 million and $41 million during the three and nine months ended September 30, 2011, respectively, due to the impairment of an entity accounted for under the equity method of accounting. Refer to Note 10. The Company does not expect to receive a tax benefit on the portion of the impairment recorded during the three months ended September 30, 2011.
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9 |
Related to charges of $89 million and $372 million during the three and nine months ended September 30, 2011, respectively, 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 charge of $14 million due to costs associated with the merger of Arca and Contal and the finalization of working capital adjustments related to the sale of all our ownership interests in our Norwegian and Swedish bottling operations to New CCE. 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 $42 million, primarily due to the Company's proportionate share of unusual or infrequent items recorded by certain of our equity method investees; a net charge on the repurchase and/or exchange of certain long-term debt we assumed in connection with our acquisition of CCE's former North America business; and a net charge associated with the earthquake and tsunami that devastated northern and eastern Japan on March 11, 2011. Refer to Note 10.
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13 |
Related to a net gain of $479 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 and the finalization of working capital adjustments related to the sale of all our ownership interests in our Norwegian and Swedish bottling operations to New CCE. Refer to Note 10.
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14 |
Related to a net charge of $151 million, primarily due to charges related to the earthquake and tsunami that devastated northern and eastern Japan on March 11, 2011; our proportionate share of unusual or infrequent items recorded by certain of our equity method investees; the amortization of favorable supply contracts acquired in connection with our acquisition of CCE's former North America business; and a net charge on the repurchase and/or exchange of certain long-term debt we assumed in connection with the CCE transaction. Refer to Note 10.
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During the first quarter of 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. During the three months ended September 28, 2012, the Company determined that the liability associated with the tax position is now certain, and thus recorded the liability as an income tax payable. There has not been a material change in the balance of our unrecognized tax benefits as a result of this litigation. In addition, the litigation did not have a material impact on the Company's condensed consolidated statements of income during the three and nine months ended September 28, 2012.
As of September 28, 2012, the gross amount of unrecognized tax benefits was $328 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 $190 million, exclusive of any benefits related to interest and penalties. The remaining $138 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 nine months ended September 28, 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 |
68 |
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Decrease related to prior period tax positions |
(7 |
) |
Increase related to current period tax positions |
17 |
|
Decrease related to settlements with taxing authorities |
(45 |
) |
Decrease as a result of a lapse of the applicable statute of limitations |
(7 |
) |
Decrease from effects of foreign currency exchange rates |
(18 |
) |
Balance of unrecognized tax benefits as of September 28, 2012 |
$ |
328 |
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The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company had $119 million and $110 million in interest and penalties related to unrecognized tax benefits accrued as of September 28, 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 nine months ended September 28, 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 nine months ended September 28, 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 forecasts of future earnings, 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 $153 million during the nine months ended September 28, 2012. 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.