Coca Cola 2011 Annual Report Download - page 44

Income Taxes
Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in the various
jurisdictions in which we operate. Significant judgment is required in determining our annual tax expense and in evaluating our tax
positions. We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that
the positions become uncertain based upon one of the following: (1) the tax position is not ‘‘more likely than not’’ to be sustained,
(2) the tax position is ‘‘more likely than not’’ to be sustained, but for a lesser amount, or (3) the tax position is ‘‘more likely than
not’’ to be sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating
whether or not a tax position is uncertain, (1) we presume the tax position will be examined by the relevant taxing authority that
has full knowledge of all relevant information, (2) the technical merits of a tax position are derived from authorities such as
legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of
the tax position, and (3) each tax position is evaluated without considerations of the possibility of offset or aggregation with other
tax positions taken. We adjust these reserves, including any impact on the related interest and penalties, in light of changing facts
and circumstances, such as the progress of a tax audit. Refer to the heading ‘‘Operations Review — Income Taxes’’ below.
A number of years may elapse before a particular matter for which we have established a reserve is audited and finally resolved.
The number of years with open tax audits varies depending on the tax jurisdiction. The tax benefit that has been previously
reserved because of a failure to meet the ‘‘more likely than not’’ recognition threshold would be recognized in our income tax
expense in the first interim period when the uncertainty disappears under any one of the following conditions: (1) the tax position
is ‘‘more likely than not’’ to be sustained, (2) the tax position, amount, and/or timing is ultimately settled through negotiation or
litigation, or (3) the statute of limitations for the tax position has expired. Settlement of any particular issue would usually require
the use of cash.
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, the annual tax rate reflected in our consolidated financial statements is different from 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 and manner 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 taxable 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. As of December 31, 2011, the Company’s valuation allowances on deferred tax assets were
$859 million and are primarily related to uncertainties regarding the future realization of recorded tax benefits on tax loss
carryforwards generated in various jurisdictions. 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 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.
The Company does not record a U.S. deferred tax liability for the excess of the book basis over the tax basis of its investments in
foreign corporations to the extent that the basis difference results from earnings that meet the indefinite reversal criteria. This
criteria is met if the foreign subsidiary has invested, or will invest, the undistributed earnings indefinitely. The decision as to the
amount of undistributed earnings that the Company intends to maintain in non-U.S. subsidiaries takes into account items
including, but not limited to, forecasts and budgets of financial needs of cash for working capital, liquidity plans, capital
improvement programs, merger and acquisition plans, and planned loans to other non-U.S. subsidiaries. The Company also
evaluates its expected cash requirements in the United States. Other factors that can influence that determination are local
restrictions on remittances (for example, in some countries a central bank application and approval are required in order for the
Company’s local country subsidiary to pay a dividend), economic stability and asset risk. As of December 31, 2011, undistributed
earnings of the Company’s foreign subsidiaries that met the indefinite reversal criteria amounted to $23.5 billion. Refer to Note 14
of Notes to Consolidated Financial Statements.
The Company’s effective tax rate is expected to be approximately 24.0 percent to 25.0 percent in 2012. This estimated tax rate
does not reflect the impact of any unusual or special items that may affect our tax rate in 2012.
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