INCOME TAXES
Income before income taxes consisted of the following (in millions):
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|
Year Ended December 31, |
2013 |
|
|
2012 |
|
|
2011 |
|
United States |
$ |
2,451 |
|
|
$ |
3,526 |
|
|
$ |
3,029 |
|
International |
9,026 |
|
|
8,283 |
|
|
8,429 |
|
Total |
$ |
11,477 |
|
|
$ |
11,809 |
|
|
$ |
11,458 |
|
Income tax expense consisted of the following for the years ended December 31, 2013, 2012 and 2011 (in millions):
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United States |
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|
State and Local |
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|
International |
|
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Total |
|
2013 |
|
|
|
|
|
|
|
Current |
$ |
713 |
|
|
$ |
102 |
|
|
$ |
1,388 |
|
|
$ |
2,203 |
|
Deferred |
305 |
|
|
38 |
|
|
305 |
|
|
648 |
|
2012 |
|
|
|
|
|
|
|
Current |
$ |
602 |
|
|
$ |
74 |
|
|
$ |
1,415 |
|
|
$ |
2,091 |
|
Deferred |
936 |
|
|
33 |
|
|
(337 |
) |
|
632 |
|
2011 |
|
|
|
|
|
|
|
Current |
$ |
286 |
|
|
$ |
66 |
|
|
$ |
1,425 |
|
|
$ |
1,777 |
|
Deferred |
898 |
|
|
27 |
|
|
110 |
|
|
1,035 |
|
We made income tax payments of $2,162 million, $981 million and $1,612 million in 2013, 2012 and 2011, 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, |
2013 |
|
|
2012 |
|
|
2011 |
|
|
Statutory U.S. federal tax rate |
35.0 |
% |
|
35.0 |
% |
|
35.0 |
% |
|
State and local income taxes — net of federal benefit |
1.0 |
|
|
1.1 |
|
|
0.9 |
|
|
Earnings in jurisdictions taxed at rates different from the statutory U.S. federal rate |
(10.3 |
) |
1,2,3 |
(9.5 |
) |
6,7 |
(9.5 |
) |
10,11,12 |
Reversal of valuation allowances |
— |
|
|
(2.4 |
) |
8 |
— |
|
|
Equity income or loss |
(1.4 |
) |
4 |
(2.0 |
) |
|
(1.4 |
) |
13 |
Other operating charges |
1.2 |
|
5 |
0.4 |
|
9 |
0.3 |
|
14 |
Other — net |
(0.7 |
) |
|
0.5 |
|
|
(0.8 |
) |
15,16,17,18 |
Effective tax rate |
24.8 |
% |
|
23.1 |
% |
|
24.5 |
% |
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|
1 |
Includes a tax benefit of $26 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, in various international jurisdictions.
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2 |
Includes a tax expense of $279 million on pretax net gains of $501 million (or a 0.9 percent impact on our effective tax rate) related to the deconsolidation of our Brazilian bottling operations upon their combination with an independent bottler and a loss due to the merger of four of the Company's Japanese bottling partners. Refer to Note 2 and Note 17.
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3 |
Includes a tax expense of $3 million (or a 0.5 percent impact on our effective tax rate) related to a charge of $149 million due to the devaluation of the Venezuelan bolivar. Refer to Note 19.
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4 |
Includes an $8 million tax benefit on a pretax charge of $159 million (or a 0.4 percent impact on our effective tax rate) related to our proportionate share of unusual or infrequent items recorded by our equity method investees. Refer to Note 17.
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5 |
Includes a tax benefit of $175 million on pretax charges of $877 million (or a 1.2 percent impact on our effective tax rate) primarily related to impairment charges recorded on certain of the Company's intangible assets and charges related to the Company's productivity and reinvestment program as well as other restructuring initiatives. Refer to Note 17 and Note 18.
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6 |
Includes a tax expense of $133 million (or a 1.1 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, in various international jurisdictions.
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7 |
Includes a tax expense of $57 million on pretax net gains of $76 million (or a 0.3 percent impact on our effective tax rate) related to the following: a gain recognized as a result of the merger of Embotelladora Andina S.A. ("Andina") and Embotelladoras Coca-Cola Polar S.A. ("Polar"); a gain recognized as a result of Coca-Cola FEMSA, an equity method investee, issuing additional shares of its own stock at a per share amount greater than the carrying value of the Company's per share investment; the loss recognized on the pending sale of a majority ownership interest in our consolidated Philippine bottling operations to Coca-Cola FEMSA; and the expense recorded for the premium the Company paid over the publicly traded market price to acquire an ownership interest in Mikuni. Refer to Note 17.
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8 |
Relates to a net tax benefit of $283 million associated with the reversal of valuation allowances in certain of the Company's foreign jurisdictions.
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9 |
Includes a tax benefit of $95 million on pretax charges of $416 million (or a 0.4 percent impact on our effective tax rate) primarily related to the Company's productivity and reinvestment program as well as other restructuring initiatives; the refinement of previously established accruals related to the Company's 2008–2011 productivity initiatives; and the refinement of previously established accruals related to the Company's integration of CCE's former North America business. Refer to Note 18.
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10 |
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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11 |
Includes a zero percent effective tax rate on pretax charges of $17 million due to the impairment of available-for-sale securities. Refer to Note 3 and Note 17.
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12 |
Includes a tax expense of $299 million on pretax net gains of $641 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 Coca-Cola FEMSA, an equity method investee, issuing additional shares of its own stock 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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13 |
Includes a tax benefit of $7 million on pretax net charges of $53 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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14 |
Includes a tax benefit of $224 million on pretax charges of $732 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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15 |
Includes a tax benefit of $8 million on pretax charges of $19 million related to the amortization of favorable supply contracts acquired in connection with our acquisition of CCE's former North America business.
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16 |
Includes a tax benefit of $3 million on pretax net charges of $9 million related to the repurchase and/or exchange of certain long-term debt assumed in connection with our acquisition of CCE's former North America business as well as the early extinguishment of certain other long-term debt. Refer to Note 10.
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17 |
Includes a tax benefit of $14 million on pretax charges of $41 million related 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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18 |
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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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 expire from 2015 to 2022. We expect each of these grants to be renewed indefinitely. Tax incentive grants favorably impacted our income tax expense by $279 million, $280 million and $193 million for the years ended December 31, 2013, 2012 and 2011, 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.
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 former North America 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, 2013, the gross amount of unrecognized tax benefits was $230 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 $166 million, exclusive of any benefits related to interest and penalties. The remaining $64 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, |
2013 |
|
|
2012 |
|
|
2011 |
|
Beginning balance of unrecognized tax benefits |
$ |
302 |
|
|
$ |
320 |
|
|
$ |
387 |
|
Increases related to prior period tax positions |
1 |
|
|
69 |
|
|
9 |
|
Decreases related to prior period tax positions |
(7 |
) |
|
(15 |
) |
|
(19 |
) |
Increases related to current period tax positions |
8 |
|
|
23 |
|
|
6 |
|
Decreases related to current period tax positions |
— |
|
|
— |
|
|
(1 |
) |
Decreases related to settlements with taxing authorities |
(4 |
) |
|
(45 |
) |
|
(5 |
) |
Reductions as a result of a lapse of the applicable statute of limitations |
(59 |
) |
|
(36 |
) |
|
(46 |
) |
Increases (decreases) from effects of foreign currency exchange rates |
(11 |
) |
|
(14 |
) |
|
(11 |
) |
Ending balance of unrecognized tax benefits |
$ |
230 |
|
|
$ |
302 |
|
|
$ |
320 |
|
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company had $105 million, $113 million and $110 million in interest and penalties related to unrecognized tax benefits accrued as of December 31, 2013, 2012 and 2011, respectively. Of these amounts, $8 million of benefit, $33 million of expense and $2 million of benefit were recognized through income tax expense in 2013, 2012 and 2011, 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 settlements 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, 2013, undistributed earnings of the Company's foreign subsidiaries amounted to $30.6 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, |
2013 |
|
|
2012 |
|
|
Deferred tax assets: |
|
|
|
|
Property, plant and equipment |
$ |
102 |
|
|
$ |
89 |
|
|
Trademarks and other intangible assets |
63 |
|
|
77 |
|
|
Equity method investments (including foreign currency translation adjustment) |
243 |
|
|
209 |
|
|
Derivative financial instruments |
50 |
|
|
116 |
|
|
Other liabilities |
1,102 |
|
|
1,178 |
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|
Benefit plans |
1,237 |
|
|
1,808 |
|
|
Net operating/capital loss carryforwards |
790 |
|
|
782 |
|
|
Other |
225 |
|
|
320 |
|
|
Gross deferred tax assets |
$ |
3,812 |
|
|
$ |
4,579 |
|
|
Valuation allowances |
(586 |
) |
|
(487 |
) |
|
Total deferred tax assets1,2
|
$ |
3,226 |
|
|
$ |
4,092 |
|
|
Deferred tax liabilities: |
|
|
|
|
Property, plant and equipment |
$ |
(2,417 |
) |
|
$ |
(2,204 |
) |
|
Trademarks and other intangible assets |
(4,192 |
) |
|
(4,133 |
) |
|
Equity method investments (including foreign currency translation adjustment) |
(1,070 |
) |
|
(712 |
) |
|
Derivative financial instruments |
(147 |
) |
|
(140 |
) |
|
Other liabilities |
(69 |
) |
|
(144 |
) |
|
Benefit plans |
(473 |
) |
|
(495 |
) |
|
Other |
(810 |
) |
|
(929 |
) |
|
Total deferred tax liabilities3
|
$ |
(9,178 |
) |
|
$ |
(8,757 |
) |
|
Net deferred tax liabilities |
$ |
(5,952 |
) |
|
$ |
(4,665 |
) |
|
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|
1 |
Noncurrent deferred tax assets of $328 million and $403 million were included in the line item other assets in our consolidated balance sheets as of December 31, 2013 and 2012, respectively.
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|
2 |
Current deferred tax assets of $211 million and $244 million were included in the line item prepaid expenses and other assets in our consolidated balance sheets as of December 31, 2013 and 2012, respectively.
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3 |
Current deferred tax liabilities of $339 million and $331 million were included in the line item accounts payable and accrued expenses in our consolidated balance sheets as of December 31, 2013 and 2012, respectively.
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As of December 31, 2013 and 2012, we had $198 million of net deferred tax liabilities and $70 million of net deferred tax assets located in countries outside the United States.
As of December 31, 2013, we had $6,914 million of loss carryforwards available to reduce future taxable income. Loss carryforwards of $488 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, |
2013 |
|
|
2012 |
|
|
2011 |
|
Balance at beginning of year |
$ |
487 |
|
|
$ |
859 |
|
|
$ |
950 |
|
Additions |
169 |
|
|
126 |
|
|
138 |
|
Decrease due to transfer to assets held for sale |
— |
|
|
(146 |
) |
|
— |
|
Deductions |
(70 |
) |
|
(352 |
) |
|
(229 |
) |
Balance at end of year |
$ |
586 |
|
|
$ |
487 |
|
|
$ |
859 |
|
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 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 2013, the Company recognized a net increase of $99 million in its valuation allowances. This increase was primarily due to the addition of a deferred tax asset and related valuation allowance on certain equity method investments and increases in net operating losses during the normal course of business operations. 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 equity method investments.
In 2012, the Company recognized a net decrease of $372 million in its valuation allowances. This decrease was primarily related to the reversal of valuation allowances in several foreign jurisdictions. As a result of considering recent significant positive evidence, including, among other items, a consistent pattern of earnings in the past three years, as well as business plans showing continued profitability, 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. This decrease was also partially due to a transfer of a valuation allowance into assets held for sale as required by accounting principles generally accepted in the United States upon execution of the share purchase agreement for the sale of a majority interest in our consolidated Philippine bottling operations. Refer to Note 1 for additional information on the Company's accounting policy related to assets and liabilities held for sale. Refer to Note 2 for additional information on the Company's Philippine bottling operations. In addition, the Company recognized an increase in its valuation allowances primarily due to the addition of a deferred tax asset and related valuation allowance on certain equity method investments and increases in net operating losses during the normal course of business operations.
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 method investments. In addition, the Company recognized an increase in the valuation allowances primarily due to the carryforward of expenses disallowed in 2011 and increases in net operating losses during the normal course of business operations.