Coca-Cola Co. KO,
Shares were reduced to neutral from overweight at JPMorgan based on the risk of a multimillion dollar tax court facing the beverage giant.
JPMorgan maintained its target price of $ 55.
In November 2020, the US tax court ruled in favor of the Internal Revenue Service, finding that the company owes approximately $ 3.4 billion in taxes for the years 2007 to 2009.
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In addition, there is a risk that this amount will more than triple if the IRS applies the same tax treatment to Coca-Cola for the tax years after 2009 (about $ 1 billion per year for about seven years, but less after tax reform). ), “JPMorgan JPM,
said.
Two partners from law firm Taft summarized the matter in a December blog post.
“In its simplest form, the case involved the proper distribution of profits between the US group of Coca-Cola and various foreign affiliates in connection with the production and sale of products outside of the US,” wrote partners Todd Lady and Jonathan Polak.
“[I]It reminds all companies doing international business that the IRS has the tools and the will to enforce the ‘arm’s length’ standard regarding commercial activities between companies, even if previous deals with the IRS led to a different outcome. “
Coca-Cola announced on Wednesday that it has appointed an adviser to the company and its board to advise on tax matters. J. Michael Luttig, a former US federal judge and general counsel for Boeing Co. BA,
will focus on the ongoing disputes.
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“US corporations cannot run their businesses with the uncertainty of the retroactive application of newly minted IRS tax policies to previous tax years that violate the IRS’s own previously approved policies and then have to pay billions of dollars in unexpected increased taxes that result in of the retroactive application of this new tax policy, ”Luttig said in a statement.
“In an abrupt departure from its established position long after the tax years in question, the IRS has reversed its position, which rejected approved methodology, requires a new tax calculation methodology, and now it is seeking to impose a retroactive tax increase on the company for earlier years. ”
JPMorgan calls retroactive taxation “highly debatable,” but says Luttig’s appointment is worrying.
“We believe this tax burden will continue for much of 2021, and the company may be forced to place ~ $ 3.3 billion in escrow, which would be cash outflow, in addition to a possible accounting provision,” the note said. .
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“While we think Coca-Cola has strong defense arguments, we think the risks are increasing.”
Still, analysts say Coca-Cola will come out of the coronavirus pandemic in an even stronger position, thanks to measures including the elimination of “ zombie brands. ”
Coca-Cola stock is down 8.4% in the past year, while the Dow Jones Industrial Average DJIA,
has increased 8.6% over the period.