stock has fallen more than 10% in 2021, as the shares took a hit right at the start of the new year, after four straight days of analyst downgrades. But
says the beverage giant’s looming tax troubles—a notable force dragging down the stock—might not be as bad as some on Wall Street think.
Analyst Steve Powers takes a look at Coca-Cola’s (KO) tax issues, the most pressing of which stem from a U.S. Tax Court’s ruling in November. The court decision means that the company could be on the hook for $3.3 billion in taxes related to issues from 2007 to 2009—and potentially more if the ruling can be applied to later years as well. In November, Coke said it was disappointed with the ruling and planned “to continue to vigorously defend our position.”
Powers notes that there are potential factors that could limit the company’s overall tax liability.
First, he points to the corporate tax cuts of 2017. Part of that legislation requires companies to pay a transition tax on foreign earnings dating back to 1987 that were previously untaxed because they were considered fully invested abroad. This transition tax amounted to roughly $5 billion for Coke. To “the extent the Tax Court’s November decision holds and certain portions of Coke’s total accumulated post-1986 foreign earnings (as of 2017) are reallocated to the U.S., the company’s transition tax payable could theoretically be reduced,” Powers writes. That could help offset past or future tax bills.
That legislation also introduced global intangible low-taxed income (GILTI)—income earned by overseas affiliates that exceeds 10% of depreciable tangible property—and related minimum tax. Right now, the amount of GILTI tax that Coke pays is unknown. Powers ballparks it at $100 million a year, but “to the extent that Coke has been or is set to incur higher taxes on GILTI under the current transfer pricing and tax regime, then the incremental tax liability owed post-2017 under reallocation could be lower than we’ve assumed.”
Finally, there’s the rule that foreign-derived intangible income (FDII) be taxed at a reduced rate relative to standard U.S. corporate income, when it derives from exported products tied to intangible assets. Powers thinks this definition could apply to Coke’s products. And “should Coke be able to define income reapportioned to the U.S. as FDII, then the incremental tax owed on such income could be meaningfully less than what we have assumed” for 2018 and beyond.
That said, Powers still has a Hold rating on the shares, given the ongoing uncertainty of the situation.
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