INCOME TAXES
Income before income taxes consisted of the following (in millions):
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|
Year Ended December 31, |
2011 |
|
|
2010 |
|
|
2009 |
|
United States |
$ |
3,010 |
|
|
$ |
7,224 |
|
1 |
$ |
2,691 |
|
International |
8,429 |
|
|
7,019 |
|
|
6,255 |
|
|
$ |
11,439 |
|
|
$ |
14,243 |
|
|
$ |
8,946 |
|
|
|
1 |
The increase in 2010 was primarily attributable to a $4,978 million gain due to the remeasurement of our equity investment in CCE to fair value upon our acquisition of CCE's North American business. Refer to Note 2.
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Income tax expense consisted of the following for the years ended December 31, 2011, 2010 and 2009 (in millions):
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United States |
|
|
State and Local |
|
|
International |
|
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Total |
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2011 |
|
|
|
|
|
|
|
Current |
$ |
286 |
|
|
$ |
66 |
|
|
$ |
1,425 |
|
|
$ |
1,777 |
|
Deferred |
891 |
|
|
27 |
|
|
110 |
|
|
1,028 |
|
2010 |
|
|
|
|
|
|
|
Current |
$ |
470 |
|
|
$ |
85 |
|
|
$ |
1,212 |
|
|
$ |
1,767 |
|
Deferred |
599 |
|
|
2 |
|
|
16 |
|
|
617 |
|
2009 |
|
|
|
|
|
|
|
Current |
$ |
509 |
|
|
$ |
79 |
|
|
$ |
1,099 |
|
|
$ |
1,687 |
|
Deferred |
322 |
|
|
18 |
|
|
13 |
|
|
353 |
|
We made income tax payments of $1,612 million, $1,766 million and $1,534 million in 2011, 2010 and 2009, respectively.
A reconciliation of the statutory U.S. federal tax rate and our effective tax rate is as follows:
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Year Ended December 31, |
2011 |
|
|
2010 |
|
|
2009 |
|
|
Statutory U.S. federal tax rate |
35.0 |
% |
|
35.0 |
% |
|
35.0 |
% |
|
State and local income taxes — net of federal benefit |
0.9 |
|
|
0.6 |
|
|
0.7 |
|
|
Earnings in jurisdictions taxed at rates different from the statutory U.S. federal rate |
(9.5 |
) |
1,2.3 |
(5.6 |
) |
11 |
(11.6 |
) |
19 |
Equity income or loss |
(1.4 |
) |
4 |
(1.9 |
) |
12 |
(2.3 |
) |
20 |
CCE transaction |
— |
|
|
(12.5 |
) |
13,14 |
— |
|
|
Sale of Norwegian and Swedish bottling operations |
— |
|
5 |
0.4 |
|
15 |
— |
|
|
Other operating charges |
0.3 |
|
6 |
0.4 |
|
16 |
0.6 |
|
21 |
Other — net |
(0.8 |
) |
7,8,9,10 |
0.3 |
|
17,18 |
0.4 |
|
22,23 |
Effective tax rate |
24.5 |
% |
|
16.7 |
% |
|
22.8 |
% |
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|
1 |
Includes a tax benefit of $6 million related to amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties, in various international jurisdictions.
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2 |
Includes a zero percent effective tax rate on charges due to the impairment of available-for-sale securities. Refer to Note 3 and Note 17.
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3 |
Includes a tax expense of $299 million (or a 0.7 percent impact on our effective tax rate) related to the net gain recognized as a result of the merger of Embotelladoras Arca, S.A.B. de C.V. ("Arca") and Grupo Continental S.A.B. ("Contal"), the gain recognized on the sale of our investment in Embonor and gains the Company recognized as a result of an equity method investee issuing additional shares of its own stock during the year at per share amounts greater than the carrying value of the Company's per share investment. These gains were partially offset by charges associated with certain of the Company's equity method investments in Japan. Refer to Note 17.
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4 |
Includes a tax benefit of $7 million (or a 0.1 percent impact on our effective tax rate) related to our proportionate share of asset impairments and restructuring charges recorded by certain of our equity method investees. Refer to Note 17.
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5 |
Includes a tax benefit of $2 million related to the finalization of working capital adjustments on the sale of our Norwegian and Swedish bottling operations. Refer to Note 2 and Note 17.
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6 |
Includes a tax benefit of $224 million (or a 0.3 percent impact on our effective tax rate) primarily related to the Company's productivity, integration and restructuring initiatives, transaction costs incurred in connection with the merger of Arca and Contal, costs associated with the earthquake and tsunami that devastated northern and eastern Japan and costs associated with the flooding in Thailand. Refer to Note 17.
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7 |
Includes a tax benefit of $8 million related to the amortization of favorable supply contracts acquired in connection with our acquisition of CCE's North American business.
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8 |
Includes a tax benefit of $3 million related to net charges we recognized on the repurchase and/or exchange of certain long-term debt assumed in connection with our acquisition of CCE's North American business as well as the early extinguishment of certain other long-term debt. Refer to Note 10.
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9 |
Includes a tax benefit of $14 million on charges due to the impairment of an investment in an entity accounted for under the equity method of accounting. Refer to Note 17.
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10 |
Includes a tax benefit of $2 million related to amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties, in certain domestic jurisdictions.
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11 |
Includes tax expense of $265 million (or a 1.9 percent impact on our effective tax rate), primarily related to deferred tax expense on certain current year undistributed foreign earnings that are not considered indefinitely reinvested and amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties.
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12 |
Includes a tax benefit of $9 million (or a 0.1 percent impact on our effective tax rate) related to charges recorded by our equity method investees. Refer to Note 17.
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|
13 |
Includes a tax benefit of $34 million (or a reduction of 12.5 percent on our effective tax rate) related to the remeasurement of our equity investment in CCE to fair value upon our acquisition of CCE's North American business. The tax benefit reflects the impact of reversing deferred tax liabilities associated with our equity investment in CCE prior to the acquisition. Refer to Note 2.
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14 |
Includes a tax benefit of $99 million related to charges associated with the write-off of preexisting relationships with CCE. Refer to Note 2.
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15 |
Includes a tax expense of $261 million (or a 0.4 percent impact on our effective tax rate) related to the sale of our Norwegian and Swedish bottling operations. Refer to Note 2.
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16 |
Includes a tax benefit of $223 million (or a 0.4 percent impact on our effective tax rate), primarily related to the Company's productivity, integration and restructuring initiatives, transaction costs and charitable contributions. Refer to Note 17.
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17 |
Includes a tax benefit of $114 million (or a 0.5 percent impact on our effective tax rate) related to charges associated with the repurchase of certain long-term debt and costs associated with the settlement of treasury rate locks issued in connection with the debt tender offer, the loss related to the remeasurement of our Venezuelan subsidiary's net assets, other-than-temporary impairment charges and a donation of preferred shares in one of our equity method investees. Refer to Note 17.
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18 |
Includes a tax expense of $31 million (or a 0.2 percent impact on our effective tax rate) related to amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties, and other tax matters in certain domestic jurisdictions.
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|
19 |
Includes a tax benefit of $16 million (or a reduction of 0.2 percent on our effective tax rate) related to amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties, in various international jurisdictions.
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20 |
Includes a tax benefit of $17 million (or a 0.1 percent impact on our effective tax rate) related to charges recorded by our equity method investees. Refer to Note 17.
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21 |
Includes a tax benefit of $16 million (or a 0.6 percent impact on our effective tax rate) related to restructuring charges and asset impairments. Refer to Note 17.
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22 |
Includes a zero percent effective rate (or a reduction of 0.2 percent on our effective tax rate) related to the sale of all or a portion of certain investments. Refer to Note 3.
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23 |
Includes a zero percent effective rate (or a 0.1 percent impact on our effective tax rate) related to an other-than-temporary impairment of a cost method investment. Refer to Note 17.
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Our effective tax rate reflects the tax 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 range from 2015 to 2020. We expect each of the grants to be renewed indefinitely. Tax incentive grants favorably impacted our income tax expense by $193 million, $145 million and $191 million for the years ended December 31, 2011, 2010 and 2009, respectively. 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.
In 2010, the Company recorded a $4,978 million pre-tax remeasurement gain associated with the acquisition of CCE's North American business. This remeasurement gain was not recognized for tax purposes and therefore no tax expense was recorded on this gain. Also, as a result of this acquisition, the Company was required to reverse $34 million of deferred tax liabilities which were associated with our equity investment in CCE prior to the acquisition. In addition, the Company recognized a $265 million charge related to the settlement of preexisting relationships with CCE, and we recorded a tax benefit of 37 percent related to this charge.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. U.S. tax authorities have completed their federal income tax examinations for all years prior to 2005. With respect to state and local jurisdictions and countries outside the United States, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for years before 2002. For U.S. federal and state tax purposes, the net operating losses and tax credit carryovers acquired in connection with our acquisition of CCE's North American business that were generated between the years of 1990 through 2010 are subject to adjustments, until the year in which they are actually utilized is no longer subject to examination.
Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, including interest and penalties, have been provided for any adjustments that are expected to result from those years.
As of December 31, 2011, the gross amount of unrecognized tax benefits was $320 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 $149 million, exclusive of any benefits related to interest and penalties. The remaining $171 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 benefit amounts is as follows (in millions):
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Year Ended December 31, |
2011 |
|
|
2010 |
|
|
2009 |
|
Beginning balance of unrecognized tax benefits |
$ |
387 |
|
|
$ |
354 |
|
|
$ |
369 |
|
Increases related to prior period tax positions |
9 |
|
|
26 |
|
|
49 |
|
Decreases related to prior period tax positions |
(19 |
) |
|
(10 |
) |
|
(28 |
) |
Increases related to current period tax positions |
6 |
|
|
33 |
|
|
16 |
|
Decreases related to current period tax positions |
(1 |
) |
|
— |
|
|
— |
|
Decreases related to settlements with taxing authorities |
(5 |
) |
|
— |
|
|
(27 |
) |
Reductions as a result of a lapse of the applicable statute of limitations |
(46 |
) |
|
(1 |
) |
|
(73 |
) |
Increase related to acquisition of CCE's North American business |
— |
|
|
6 |
|
|
— |
|
Increases (decreases) from effects of foreign currency exchange rates |
(11 |
) |
|
(21 |
) |
|
48 |
|
Ending balance of unrecognized tax benefits |
$ |
320 |
|
|
$ |
387 |
|
|
$ |
354 |
|
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company had $110 million, $112 million and $94 million in interest and penalties related to unrecognized tax benefits accrued as of December 31, 2011, 2010 and 2009, respectively. Of these amounts, $2 million of benefit, $17 million of expense and $16 million of benefit was recognized through income tax expense in 2011, 2010 and 2009, respectively. If the Company were to prevail on all uncertain tax positions, the reversal of this accrual would also be a benefit to the Company's effective tax rate.
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 consolidated statements of income or consolidated balance sheets. These changes may be the result of settlement of ongoing audits, statute of limitations expiring, or final settlements in transfer pricing matters that are the subject of litigation. At this time, an estimate of the range of the reasonably possible outcomes cannot be made.
As of December 31, 2011, undistributed earnings of the Company's foreign subsidiaries amounted to $23.5 billion. Those earnings are considered to be indefinitely reinvested and, accordingly, no U.S. federal and state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practical because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credits would be available to reduce a portion of the U.S. tax liability.
The tax effects of temporary differences and carryforwards that give rise to deferred tax assets and liabilities consist of the following (in millions):
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December 31, |
2011 |
|
|
2010 |
|
|
Deferred tax assets: |
|
|
|
|
Property, plant and equipment |
$ |
224 |
|
|
$ |
49 |
|
|
Trademarks and other intangible assets |
68 |
|
|
271 |
|
|
Equity method investments (including translation adjustment) |
278 |
|
|
304 |
|
|
Net change in unrealized gain/loss |
43 |
|
|
28 |
|
|
Other liabilities |
1,257 |
|
|
1,257 |
|
|
Benefit plans |
2,022 |
|
|
2,019 |
|
|
Net operating/capital loss carryforwards |
818 |
|
|
911 |
|
|
Other |
418 |
|
|
683 |
|
1 |
Gross deferred tax assets |
$ |
5,128 |
|
|
$ |
5,522 |
|
|
Valuation allowances |
(859 |
) |
|
(950 |
) |
|
Total deferred tax assets2,3
|
$ |
4,269 |
|
|
$ |
4,572 |
|
|
Deferred tax liabilities: |
|
|
|
|
Property, plant and equipment |
$ |
(2,039 |
) |
|
$ |
(2,227 |
) |
|
Trademarks and other intangible assets |
(4,201 |
) |
|
(4,284 |
) |
|
Equity method investments (including translation adjustment) |
(816 |
) |
|
(509 |
) |
|
Net change in unrealized gain/loss |
(129 |
) |
|
(102 |
) |
|
Other liabilities |
(129 |
) |
|
(5 |
) |
|
Benefit plans |
(445 |
) |
|
(383 |
) |
|
Other |
(753 |
) |
|
(765 |
) |
|
Total deferred tax liabilities4
|
$ |
(8,512 |
) |
|
$ |
(8,275 |
) |
|
Net deferred tax liabilities |
$ |
(4,243 |
) |
|
$ |
(3,703 |
) |
|
|
|
1 |
Includes $183 million of tax credit carryforwards acquired in conjunction with our acquisition of CCE's North American business.
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2 |
Noncurrent deferred tax assets of $243 million and $98 million were included in the line item other assets in our consolidated balance sheets as of December 31, 2011 and 2010, respectively.
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3 |
Current deferred tax assets of $227 million and $478 million were included in the line item prepaid expenses and other assets in our consolidated balance sheets as of December 31, 2011 and 2010, respectively.
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4 |
Current deferred tax liabilities of $19 million and $18 million were included in the line item accounts payable and accrued expenses in our consolidated balance sheets as of December 31, 2011 and 2010, respectively.
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As of December 31, 2011 and 2010, we had $491 million and $445 million, respectively, of net deferred tax liabilities located in countries outside the United States.
As of December 31, 2011, we had $6,297 million of loss carryforwards available to reduce future taxable income. Loss carryforwards of $391 million must be utilized within the next five years and the remainder can be utilized over a period greater than five years.
An analysis of our deferred tax asset valuation allowances is as follows (in millions):
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|
Year Ended December 31, |
2011 |
|
|
2010 |
|
|
2009 |
|
Balance at beginning of year |
$ |
950 |
|
|
$ |
681 |
|
|
$ |
569 |
|
Increase due to our acquisition of CCE's North American business |
— |
|
|
291 |
|
|
— |
|
Additions |
138 |
|
|
115 |
|
|
178 |
|
Deductions |
(229 |
) |
|
(137 |
) |
|
(66 |
) |
Balance at end of year |
$ |
859 |
|
|
$ |
950 |
|
|
$ |
681 |
|
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. These valuation allowances were primarily related to deferred tax assets generated from net operating losses. Current evidence does not suggest we will realize sufficient taxable income of the appropriate character (e.g., capital gain versus ordinary income) within the carryforward period to allow us to realize these deferred tax benefits. If we were to identify and implement tax planning strategies to recover these deferred tax assets or generate sufficient income of the appropriate character in these jurisdictions in the future, it could lead to the reversal of these valuation allowances and a reduction of income tax expense. The Company believes that it will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets in our consolidated balance sheets.
In 2011, the Company recognized a net decrease of $91 million in its valuation allowances. This decrease was primarily related to the utilization of net operating losses during the normal course of business operations, the reversal of a deferred tax asset and related valuation allowance on certain expiring attributes and the reversal of a deferred tax asset and related valuation allowance on certain equity investments. In addition, the Company recognized an increase in the valuation allowances primarily due to the carryforward of expenses disallowed in the current year and increases in net operating losses during the normal course of business operations.
In 2010, the Company recognized a net increase of $269 million in its valuation allowances. This increase was primarily related to valuation allowances on various tax loss carryforwards acquired in conjunction with our acquisition of CCE's North American business. The Company also recognized an increase in the valuation allowances due to the carryforward of expenses disallowed in the current year and changes to deferred tax assets and a related valuation allowance on certain equity method investments. In addition, the Company recognized a reduction in the valuation allowances primarily due to the reversal of a deferred tax asset and related valuation allowance on certain expiring attributes, the reversal of a deferred tax asset and related valuation allowance related to the deconsolidation of certain entities and the impact of foreign currency fluctuations.
In 2009, the Company recognized a net increase of $112 million in its valuation allowances. This increase was primarily related to asset impairments, increases in net operating losses during the normal course of business operations and the impact of foreign currency fluctuations. In addition, the Company recognized a reduction in the valuation allowances due to the reversal of a deferred tax asset and related valuation allowance on certain equity investments.