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 35.0 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 2017 to 2036. We anticipate that we will be able to extend or renew the grants in these locations. 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 2017 is 24.0 percent. However, in arriving at this estimate we do not include the estimated impact of significant operating and nonoperating items, which may cause significant variations in the customary relationship between income tax expense and income before income taxes.
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 7.
The Company recorded income tax expense of $323 million (21.4 percent effective tax rate) and $401 million (21.2 percent effective tax rate) during the three months ended March 31, 2017 and April 1, 2016, 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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March 31, 2017 |
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April 1,
2016 |
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Asset impairments |
$ |
— |
|
1 |
$ |
— |
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Productivity and reinvestment program |
(52 |
) |
2 |
(21 |
) |
2 |
Other productivity, integration and restructuring initiatives |
— |
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|
— |
|
3 |
Transaction gains and losses |
(174 |
) |
4 |
(143 |
) |
5 |
Certain tax matters |
(30 |
) |
6 |
(6 |
) |
7 |
Other — net |
(17 |
) |
8 |
(1 |
) |
9 |
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1 |
Related to charges of $104 million due to the impairment of certain of the Company's intangible assets. Refer to Note 10 and Note 14.
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2 |
Related to charges of $139 million and $63 million during the three months ended March 31, 2017 and April 1, 2016, respectively. These charges were due to the Company's productivity and reinvestment program. Refer to Note 10 and Note 11.
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3 |
Related to charges of $199 million during the three months ended April 1, 2016. These charges were due to the integration of our German bottling operations. Refer to Note 10 and Note 11.
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4 |
Related to charges of $665 million primarily on pretax charges of $497 million as a result of the refranchising of certain bottling territories in North America, $57 million related to costs incurred to refranchise certain of our bottling operations and charges of $106 million primarily related to payments made to convert certain North America bottling partners' territories to a single form of CBA with additional requirements. Refer to Note 2 and Note 10.
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5 |
Related to a net charge of $397 million that primarily included $369 million of charges primarily due to the refranchising of bottling territories in North America and $45 million related to costs incurred to refranchise certain of our bottling operations, partially offset by an $18 million gain related to the disposal of our investment in Keurig. Refer to Note 2 and Note 10.
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6 |
Related to $53 million of excess tax benefits associated with the Company's share-based compensation arrangements partially offset by 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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7 |
Primarily related to amounts required to be recorded as a result of a tax rate change in Japan and 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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8 |
Related to charges of $64 million that included a $58 million net charge due to our proportionate share of significant operating and nonoperating items recorded by certain of our equity method investees and a $6 million charge due to tax litigation expense. Refer to Note 10.
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9 |
Related to charges of $6 million that included a $3 million net charge due to our proportionate share of significant operating and nonoperating items recorded by certain of our equity method investees and a $3 million charge due to tax litigation expense. Refer to Note 10.
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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 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.