Coca-Cola Co. KO,
The shares were downgraded from overweight to neutral at JPMorgan based on the risk posed by a multi-billion dollar tax court facing the beverage giant.
JPMorgan maintained its $ 55 price target.
In November 2020, the United States Tax Court ruled in favor of the Internal Revenue Service and determined that the company owes about $ 3.4 billion in taxes between the years 2007 to 2009.
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“In addition, there is a risk that this amount may more than triple if the IRS applies the same tax treatment to Coca-Cola in the fiscal years after 2009 (about $ 1 billion a year for about seven years, but less after tax reform), ”JPMorgan JPM,
said.
Two partners from the Taft law firm summarized the issue in a blog post in December.
“In its simplest form, the case involved the appropriate division of profits between the Coca-Cola group in the United States and several foreign affiliates in connection with the manufacture and sale of products outside the United States,” wrote partners Todd Lady and Jonathan Polak .
“[I]This serves as a reminder to all companies conducting international business that the IRS has the tools and willingness to apply the ‘arm’s length’ standard with respect to business activities between companies, even when past understandings with the IRS have led to a different result. “
Coca-Cola announced on Wednesday that it had appointed an advisor for the company and its board to advise on tax matters. J. Michael Luttig, former US federal judge and general counsel for Boeing Co. BA,
focus on the ongoing dispute.
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“American companies cannot conduct their business with the uncertainty of retroactively applying newly created IRS tax policies to previous tax years that are contrary to the IRS’s own previously approved policies and therefore need to pay billions of dollars in unforeseen increased taxes. that result from the retroactive application of these new fiscal policies, ”Luttig said in a statement.
“In an abrupt departure from its established position long after the fiscal years in question, the IRS reversed its position, disapproved of the approved methodology, demanded a new tax calculation methodology and now seeks to impose a retroactive tax increase on the company to the tax spent years. ”
JPMorgan considers retroactive tax collection “highly debatable”, but says Luttig’s appointment is a cause for concern.
“We believe that this tax overload could last for a good part of 2021, and the company may be forced to put ~ $ 3.3 billion in deposit, which would be a cash outflow, in addition to a potential accounting provision,” the note said. .
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“While we believe Coca-Cola has strong defense arguments, we believe that the risks are increasing.”
Still, analysts say Coca-Cola will emerge from the coronavirus pandemic in an even stronger position, thanks to measures that include the elimination of “zombie brands”.
Coca-Cola shares fell 8.4% last year, while the Dow Jones Industrial Average DJIA,
gained 8.6% in the period.