Coca Cola 2005 Annual Report Download - page 42

reserve when we determine the likelihood of loss is probable. Such liabilities are recorded in the line item
accrued income taxes in the Company’s consolidated balance sheets. Settlement of any particular issue would
usually require the use of cash. Favorable resolutions of tax matters for which we have previously established
reserves are recognized as a reduction to our income tax expense when the amounts involved become known.
Tax law requires items to be included in the tax return at different times than when these items are reflected
in the consolidated financial statements. As a result, our annual tax rate reflected in our consolidated financial
statements is different than that reported in our tax return (our cash tax rate). Some of these differences are
permanent, such as expenses that are not deductible in our tax return, and some differences reverse over time,
such as depreciation expense. These timing differences create deferred tax assets and liabilities. Deferred tax
assets and liabilities are determined based on temporary differences between the financial reporting and tax
bases of assets and liabilities. The tax rates used to determine deferred tax assets or liabilities are the enacted tax
rates in effect for the year in which the differences are expected to reverse. Based on the evaluation of all
available information, the Company recognizes future tax benefits, such as net operating loss carryforwards, to
the extent that realizing these benefits is considered more likely than not.
We evaluate our ability to realize the tax benefits associated with deferred tax assets by analyzing our
forecasted taxable income using both historical and projected future operating results, the reversal of existing
temporary differences, taxable income in prior carryback years (if permitted) and the availability of tax planning
strategies. A valuation allowance is required to be established unless management determines that it is more
likely than not that the Company will ultimately realize the tax benefit associated with a deferred tax asset.
Additionally, undistributed earnings of a subsidiary are accounted for as a temporary difference, except that
deferred tax liabilities are not recorded for undistributed earnings of a foreign subsidiary that are deemed to be
indefinitely reinvested in the foreign jurisdiction. The Company has formulated a specific plan for reinvestment
of undistributed earnings of its foreign subsidiaries which demonstrates that such earnings will be indefinitely
reinvested in the applicable jurisdictions. Should we change our plans, we would be required to record a
significant amount of deferred tax liabilities.
The American Jobs Creation Act of 2004 (the ‘‘Jobs Creation Act’’) was enacted in October 2004. Among
other things, it provided a one-time benefit related to foreign tax credits generated by equity investments in prior
years. In 2004, the Company recorded an income tax benefit of approximately $50 million as a result of this new
law. The Jobs Creation Act also included a temporary incentive for U.S. multinationals to repatriate foreign
earnings at an approximate 5.25 percent effective tax rate. During 2005, the Company repatriated approximately
$6.1 billion in previously unremitted foreign earnings, with an associated tax liability of approximately
$315 million. The reinvestment requirements of this repatriation are expected to be fulfilled by 2008 and are not
expected to require any material change in the nature, amount or timing of future expenditures from what was
otherwise expected. Refer to Note 1 and Note 16 of Notes to Consolidated Financial Statements.
The Company’s effective tax rate is expected to be approximately 24 percent in 2006. This estimated tax rate
does not reflect the impact of any unusual or special items that may affect our tax rate in 2006.
Contingencies
Our Company is subject to various claims and contingencies, mostly related to legal proceedings. Due to
their nature, such legal proceedings involve inherent uncertainties including, but not limited to, court rulings,
negotiations between affected parties and governmental actions. Management assesses the probability of loss for
such contingencies and accrues a liability and/or discloses the relevant circumstances, as appropriate.
Management believes that any liability to the Company that may arise as a result of currently pending legal
proceedings or other contingencies will not have a material adverse effect on the financial condition of the
Company taken as a whole. Refer to Note 12 of Notes to Consolidated Financial Statements.
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