Coca Cola 2015 Annual Report Download - page 112

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Guarantees
As of December 31, 2015, we were contingently liable for guarantees of indebtedness owed by third parties of $572 million, of which $263 million was
related to VIEs. Refer to Note 1 for additional information related to the Company's maximum exposure to loss due to our involvement with VIEs. Our
guarantees are primarily related to third-party customers, bottlers, vendors and container manufacturing operations and have arisen through the normal course
of business. These guarantees have various terms, and none of these guarantees was individually significant. The amount represents the maximum potential
future payments that we could be required to make under the guarantees; however, we do not consider it probable that we will be required to satisfy these
guarantees.
We believe our exposure to concentrations of credit risk is limited due to the diverse geographic areas covered by our operations.
Legal Contingencies
The Company is involved in various legal proceedings. We establish reserves for specific legal proceedings when we determine that the likelihood of an
unfavorable outcome is probable and the amount of loss can be reasonably estimated. Management has also identified certain other legal matters where we
believe an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made. Management believes that the total
liabilities to the Company that may arise as a result of currently pending legal proceedings will not have a material adverse effect on the Company taken as a
whole.
Indemnifications
At the time we acquire or divest our interest in an entity, we sometimes agree to indemnify the seller or buyer for specific contingent liabilities. Management
believes that any liability to the Company that may arise as a result of any such indemnification agreements will not have a material adverse effect on the
Company taken as a whole.
Tax Audits
The Company is involved in various tax matters, with respect to some of which the outcome is uncertain. These audits may result in the assessment of
additional taxes that are subsequently resolved with authorities or potentially through the courts. Refer to Note 14.
On September 17, 2015, the Company received a Statutory Notice of Deficiency ("Notice") from the Internal Revenue Service ("IRS") for the tax years 2007
through 2009, after a five-year audit. In the Notice, the IRS claims that the Company's United States taxable income should be increased by an amount that
creates a potential additional federal income tax liability of approximately $3.3 billion for the period, plus interest. No penalties were asserted in the Notice;
however, the IRS has since taken the position that it is not precluded from asserting penalties and notified the Company that it may do so. The disputed
amounts largely relate to a transfer pricing matter involving the appropriate amount of taxable income the Company should report in the United States in
connection with its licensing of intangible property to certain related foreign licensees regarding the manufacturing, distribution, sale, marketing and
promotion of products in overseas markets.
The Company has followed the same transfer pricing methodology for these licenses since the methodology was agreed with the IRS in a 1996 closing
agreement that applied back to 1987. The closing agreement provides prospective penalty protection as long as the Company follows the prescribed
methodology and material facts and circumstances and relevant Federal tax law have not changed. On February 11, 2016, the IRS notified the Company,
without further explanation, that the IRS has determined that material facts and circumstances and relevant Federal tax law have changed and that it may
assert penalties. The Company does not agree with this determination. The Company's compliance with the closing agreement was audited and confirmed by
the IRS in five successive audit cycles covering the subsequent 11 years through 2006, with the last audit concluding as recently as 2009.
The Notice represents a repudiation of the methodology previously adopted in the 1996 closing agreement. The IRS designated the matter for litigation on
October 15, 2015. Therefore, the Company will be prevented from pursuing any administrative settlement at IRS Appeals or under the IRS Advance Pricing
and Mutual Agreement Program.
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