Coca Cola 2008 Annual Report Download - page 62

• an approximate 8.8 percent net effective tax rate on our proportionate share of impairment charges,
restructuring charges and the impact of certain tax rate changes recorded by CCE (refer to Note 3 and
Note 19 of Notes to Consolidated Financial Statements);
• an approximate 1.8 percent tax benefit on the sale of a portion of our investments in Coca-Cola Icecek
and Coca-Cola FEMSA. The tax benefit was a result of the reversal of valuation allowances on certain
deferred tax assets recorded related to capital loss carryforwards. In addition to the impact of the reversal
of valuation allowances, we also benefited from the reversal of deferred tax liabilities related to
differences between the book and tax bases in the stock sold. The tax benefit associated with the
aforementioned items was partially offset by a reduction of deferred tax assets due to the utilization of
these capital loss carryforwards. The capital loss carryforwards offset the taxable gain on the sale of a
portion of our investments in Coca-Cola Icecek and Coca-Cola FEMSA (refer to Note 19 of Notes to
Consolidated Financial Statements); and
• a tax charge of approximately $24 million related to the resolution of certain tax matters (refer to Note 17
of Notes to Consolidated Financial Statements).
The Company adopted the provisions of Interpretation No. 48 effective January 1, 2007. As a result of the
implementation of Interpretation No. 48, the Company recorded an increase of approximately $65 million in
liabilities for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007, balance
of reinvested earnings. As of December 31, 2007, the Company had recorded gross unrecognized tax benefits of
approximately $643 million.
In 2008, agreements were reached between the U.S. government and a foreign government concerning the
allocation of income between the two tax jurisdictions. Pursuant to these agreements, we made cash payments
during the third quarter of 2008 that constituted payments of tax and interest. These payments were partially
offset by tax credits taken in the third quarter and fourth quarter of 2008, and tax refunds and interest on
refunds to be received in 2009. These benefits had been recorded as deferred tax assets in prior periods. The
settlements did not have a material impact on the Company’s consolidated income statement for the year ended
December 31, 2008. The impact of these agreements, and other 2008 activity, is reflected in the balances of our
unrecognized tax benefits and deferred tax assets as of December 31, 2008, which are further discussed below.
As of December 31, 2008, the gross amount of unrecognized tax benefits was approximately $369 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 approximately $174 million. The remaining approximately $195 million, which was recorded
as a deferred tax asset, primarily represents tax benefits that would be received in different tax jurisdictions in
the event that the Company did not prevail on all uncertain tax positions. The Company recognizes accrued
interest and penalties related to unrecognized tax benefits in income tax expense. The Company had
approximately $110 million in interest and penalties related to unrecognized tax benefits accrued as of
December 31, 2008. 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.
Based on current tax laws, the Company’s effective tax rate in 2009 is expected to be approximately
23.0 percent to 24.0 percent before considering the effect of any unusual or special items that may affect our tax
rate in future years.
Liquidity, Capital Resources and Financial Position
We believe our ability to generate cash from operating activities is one of our fundamental financial
strengths. The near-term outlook for our business remains strong and we expect to generate substantial cash
flows from operations in 2009. As a result of our expected strong cash flows from operations, we have significant
flexibility to meet our financial commitments. We typically fund a significant portion of our dividends, capital
expenditures, contractual obligations, share repurchases and acquisitions with cash generated from operating
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