The U.S. Tax Cuts and Jobs Act went into effect at the end of 2017. The Coca-Cola Company has long been in favor of tax reform, and this new law made some major changes to corporate taxation that the company supports.

We wanted to take a step back and learn more about the background and impact of U.S. tax reform. We asked Coca-Cola Chief Financial Officer Kathy Waller for her perspective on this extremely complex issue.

Kathy, start with the big picture. What is the background on Coca-Cola’s position on tax reform?

We’ve supported it for a long time for several different reasons. As a global company, we had two major concerns with the high corporate tax rate in the U.S. and the worldwide system of taxation we have used – and bear with me on that last term, because it’s unfamiliar to many people and I’ll need to explain it much more in a moment. Both of these issues made the U.S. an outlier among other countries in which many of our competitors are based.

First, let’s talk about the U.S. corporate tax rate. At the former 35% rate, it was the highest among the 35 countries that are members of the Organization for Economic Co-operation and Development, which is an important benchmark. While our effective tax rate wasn’t as high as 35%, given that so much of our business is outside the U.S., it was still 24% globally. The new law lowers the U.S. tax rate to 21% on corporations, which puts rates in the U.S. more in line with other nations and, as I’ll explain later, helps lower our effective tax rate. The U.S. was also one of only a handful of OECD members that featured a worldwide tax system. 

Together, these two factors – the U.S. tax rate and the worldwide tax system – had a major impact. During the debate in the U.S. over this new act, you probably heard the term “repatriation,” which is shorthand for the transfer of money earned by foreign subsidiary operations back to the United States. In order to bring money we earned outside the U.S. back to the U.S., Coca-Cola – and global companies like Coke – would previously have been required to pay the difference between tax imposed at the 35% U.S. tax rate and the taxes already paid in the foreign country where the income was earned. Generally, those foreign taxes were lower. This is what we mean by a worldwide tax system.

The vast majority of countries have what’s known as a territorial tax system, which basically means you pay taxes on income where it’s generated and can repatriate those earnings without incurring further tax. This provides more efficiency and flexibility in cash management, which means business decisions are less impacted by tax considerations.

In contrast, the U.S. had a worldwide system, which discouraged companies like ours from bringing cash back to the U.S.

The U.S. Tax Cuts and Jobs Act eliminates the worldwide system and puts the U.S. on a modified territorial system, which means U.S. companies are on more equal footing with global competition.

For example, let’s look at how a U.S.-based company would have stacked up against a British competitor in terms of the taxation of the same amount of earnings distributed to each from a South Korean subsidiary. For every $100 of pre-tax earnings, the U.K. company could bring roughly $75 back home. In contrast, the American company would have to pay an additional $10 in U.S. federal income tax, leaving it with approximately $65 in after-tax earnings. That’s a big disadvantage that has now been removed.

The new law will enhance the ability of U.S.-headquartered companies like ours to compete globally on a more equal footing and better enable us to reinvest in our U.S. business system.

Kathy Waller

What are the biggest impacts of tax reform on Coca-Cola specifically?

It comes down to a few main things:

  • It’s more attractive to invest in the United States, because our tax rates are now more competitive.
  • We expect our global effective tax rate to decline from 24% in 2017 to approximately 21% in 2018. Given the tax law isn’t quite final, we’re expecting more guidance that will clarify some important components of the new law, which will likely impact the final effective tax rate. Earlier, I mentioned that U.S. tax rates were 35% – again, I’d note that our effective tax rate wasn’t that high, chiefly because most of our business is outside the United States in places where tax rates are lower.
  • The modified territorial system puts us on an equal footing with competitors.
  • The new law imposes a repatriation tax on historical foreign earnings that companies like Coca-Cola have been reinvesting or holding for overseas investment. For the fourth quarter of 2017, we recorded a one-time, non-cash charge of $3.6 billion. From an accounting standpoint, while we recognized the charge in the fourth quarter, it will be paid over an eight-year period, as stipulated by the new law. That means our cash flow will be impacted in future periods but, over time, the company gets a cash benefit from the lower ongoing tax rate. Overall, it nets out to be positive for our business. You’ve probably seen many other companies make similar announcements about taking a one-time charge in the fourth quarter.
  • Looking ahead, we expect to use the benefits of tax reform to repay some debt and also return cash to shareowners. Tax reform will make investing in the U.S. more attractive and should lead to economic growth.

Some companies have given bonuses to employees, or they’ve identified specific investments they plan to make in the United States. Why isn’t Coca-Cola doing that?

The first thing to note is that the new tax law is beneficial to U.S. companies but not equally beneficial. For The Coca-Cola Company, our global effective tax rate is going from 24% to approximately 21%, a 3% decrease. We are not starting at 35%. And remember, because our business is much broader than just our U.S. operations, the rate reduction is more modest than it would be for a company with operations only in the United States. In addition, it will take eight years to pay the tax bill we’re facing on overseas cash and investments. As a result, we won’t see a positive net cash impact for several years.

When you think beyond the company, we do see tax reform as having the potential to lift economic growth rates overall. When economies grow, our system grows, and that is beneficial for all of us who work here. The tax law changes also enhance our after-tax returns from investments made in the U.S. Some companies have announced or paid one-time bonuses, or they’ve announced wage increases. We believe investments in our business to support growth is the best long-term use of any tax benefits. 

Did Coca-Cola lobby for passage of tax reform?

Yes. The tax code is very, very complex, and changes to the U.S. tax law have significant consequences for a global business like ours. Policymakers are required to balance a number of concerns. They encourage businesses to provide information and explain the implications of policy choices on business outcomes. We met individually and as members of coalitions focused on changes that restored pro-growth and competitive tax policies. Those groups included the Alliance for Competitive Taxation, the U.S. Chamber of Commerce, the National Association of Manufacturers and the Business Roundtable. Tax reform had a wide base of support because of its potential to reinvigorate job growth and help U.S. companies be more competitive.