Coca-Cola downgraded to JP Morgan on multi-billion-tax case risk basis


The Coca-Cola Company,
-1.11%
Stocks at JPMorgan were downgraded from overweight to neutral based on the risk presented by the multibillion-dollar tax court challenging the beverage giant’s faces.

JPMorgan maintained its $ 55 price target.

In November 2020, the US Tax Court found favor with the Internal Revenue Service, and determined that from the years 2007 to 2009 the company owed approximately $ 3.4 billion in taxes.

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“On top of that, there is a risk that this amount could more than triple. The IRS should apply the same tax treatment to Coca-Cola for tax years after 2009 ($ 1 billion per year for approximately seven years But lower post tax reform), “JP Morgan JPM,
+ 3.28%
said.

Two partners at the law firm expressed the issue in a December blog post.

“In its simplest form, the case involved an appropriate division of profits between Coca-Cola’s American group and various foreign affiliates with respect to the manufacture and sale of products outside the US,” Tod Lady and Jonathan Pollack wrote.

“[I]The T serves as a reminder to all companies conducting international business, with the IRS having the tools and willpower to implement the ‘arm’s length’ standard in relation to business activities, even Where prior understanding with the IRS leads to a different result. ”

Coca-Cola announced on Wednesday that it had named the company and its board a consultant to advise on tax matters. J. Michael Lutig, a former US federal judge and general counsel of the Boeing Company BA,
+ 0.80%,
Will focus on ongoing litigation.

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“American companies cannot run their tax for the pre-tax approved years with the uncertainty of the preemptive application of new tax IRS tax policies that are contrary to the IRS’s already approved policies and then the need to pay billions of dollars in unexpired taxes Resulting in a retrospective application of these new tax policies, Lutig said in a statement.

“A sudden departure from its established position long after the tax years in question, the IRS reversed its position, denying that the approved methodology, a new tax calculation method, was required, and now for the previous tax on the company. Wants to implement a retrospective tax increase. Years. ”

JPMorgan calls the retrospective tax charge “highly debatable”, but says Luttig’s appointment is a cause for concern.

The note stated, “We believe this tax overhang could go into a good part of 2021, and force the company to replace $ 3.3 billion in escrow, which would be a cash outflow. ”

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“While we think Coca-Cola has strong defense arguments, we believe the risks are increasing.”

Nevertheless, analysts say that Coca-Cola will be in an even stronger position from the coronovirus epidemic thanks to measures to eliminate “zombie brands”.

Coca-Cola stock declined 8.4% compared to the previous year, while the Dow Jones Industrial Average DJIA,
+ 0.69%
Has increased by 8.6% for the period.

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