Why Coke’s $24b epic tax battle is staying hidden
The stakes of a fight with the US Internal Revenue Service over “astronomical” profits in low-tax countries are visible only in fine print.
Coca-Cola’s mysterious tax formula
Plus, H2O Asset Management pays up for ‘serious breaches’ and Glencore’s coal rethink shows how the pendulum has swung on ESG
One less European tax haven to start: Italy has doubled a flat tax on the foreign income of new residents, in a blow to rich expats seeking to flee the prospect of higher levies elsewhere in Europe.
And an upcoming webinar: Join Robert Armstrong, chief US financial commentator, and FT colleagues from Tokyo to London for an August 14 subscriber webinar (12 PM BST/7 AM EST) to discuss the recent trading turmoil and where markets go next. Register for your subscriber pass at ft.com/marketswebinar and put your questions to our panel now.
Welcome to Due Diligence, your briefing on dealmaking, private equity and corporate finance. This article is an on-site version of the newsletter. Premium subscribers can sign up here to get the newsletter delivered every Tuesday to Friday. Standard subscribers can upgrade to Premium here, or explore all FT newsletters. Get in touch with us anytime: Due.Diligence@ft.com
In today’s newsletter:
- •Coca-Cola’s stand-off with the IRS
- •H2O and Lars Windhorst’s superyacht
- •Glencore shareholders want the coal
Coca-Cola takes on the IRS over back taxes
Few things sound worse than potentially owing billions of dollars in back taxes. That could be the reality for beverage giant Coca-Cola.
A decade-long dispute between the company and the US tax authorities has escalated to the point that it could owe $16bn in back taxes, enough to wipe out a year and a half of profits, according to an examination of the controversyby the FT’s Stephen Foley and Gregory Meyer.
The total has been climbing by more than $1bn a year since a US judge found the company was hiding “astronomical levels” of profit in low-tax jurisdictions to shield them from the Internal Revenue Service, the US tax authority.
But the financial stakes have been visible only in the fine print of the fizzy drinks makers’ regulatory filings because the company is refusing to make any provision in its earnings for the possible payments — not even a $6bn initial payment it must make in the next few weeks.
The beverage giant says it expects to get the cash back after winning an appeal it plans to launch by the end of this year.
Outside lawyers, and the company’s auditor and tax adviser EY, have endorsed the company’s view that it will “more likely than not” prevail over the IRS in the end.
DD readers with the stamina may want to read the original 2020 tax court ruling to judge Coke’s odds for themselves. The ruling contains fascinating detail on how the company structures its business.
Coke says the IRS is wrong to claim all of the value of its brands sits in the Atlanta parent company. If it doesn’t persuade an appeals court, it won’t just be paying $16bn in back taxes and interest.
The IRS would also be free to impose a higher US tax bill for years to come.
H2O’s ‘extremely serious’ breaches
Back in 2019, the UK’s Financial Conduct Authoritywanted answers from H2O Asset Management.
The revered European investment firm was at the time reeling from a bombshell FT investigation, which had revealed it had poured more than €1bn of savers’ money into thinly traded bonds linked to a notorious financier with a criminal past.
In response to requests from the British regulator, H2O handed over due diligence reports and meeting minutes that it said were from the time it made the investments.
H2O also disclosed details of business meetings between its staff and Lars Windhorst — the financier at the heart of its controversial investments — along with a couple of overseas trips by its junior staff in relation to his companies.
But the FCA later discovered that many of the documents had been “fabricated”, as part of an exercise to “retrospectively” create the impression it had done due diligence.
The UK financial watchdog also soon found out that H2O had not disclosed a raft of trips that its senior staff took “on Mr Windhorst’s private jet, helicopter and superyacht”.
These are just some of the “extremely serious” breachesfound by the FCA, which have led H2O to pay €250mn to affected investors, DD’s Robert Smith and the FT’s Cynthia O’Murchu report.
In return, the FCA is waiving a “substantial fine” it would have imposed on the asset manager, which is also handing back its UK regulatory authorisation by the end of the year.
Not everyone’s happy with the outcome, with some investors insisting it’s not nearly enough money.
And how’s Windhorst doing these days?
British financier Nat Rothschild recently agreed to take a minority stake in his investment firm Tennor and become its new “executive chair”, praising Windhorst’s “buccaneering” spirit at a party at the firm’s upscale London offices in Mayfair last month.
Glencore shareholders want coal
Commodities traders are not ideological people — they’re willing to twist and turn to make a quick buck.
Gary Nagle, the head of Glencore, is no different.
On Wednesday, the company called off a proposed spin-off of the coal business following shareholder opposition.
Two major reasons to keep the unit: The pendulum has swung on ESG among investors and “cash is king”, as Nagle noted.
Cynics might say Glencore only hatched the plan to split as a way to get Canada’s Teck Resources to engage in a takeover proposal last year.
A big shift in sentiment among its investors seems questionable given shareholders have always been eyes wide open to the trader’s exposure to coal and risky jurisdictions such as the Democratic Republic of Congo.
Perhaps they got caught on what Nagle calls the “flavour of the day” in terms of following the hype on ESG and the preferences of some investors for pure-play copper producers such as Freeport-McMoRan.
Regardless, investors will watch eagle-eyed to see if Glencore lives up to its commitment to responsibly run down at least 12 mines by 2035 and how Teck’s steelmaking coal assets are integrated into its climate strategy.
But more crucially, the Baar-based group will maintain access to coal’s cash flows and its net debt cap will stay at $10bn, instead of reducing it to $5bn within 24 months as planned under a break-up.
That will give acquisitive Glencore more leeway to do deals, pursue growth plans or buy back stock after industry rival BHP made a failed £39bn foray for London-listed Anglo American earlier this year.
“The company is always open to M&A. It’s part of our DNA,” Nagle said.
Job moves
- •Zillow chief executive and co-founder Richard Barton is stepping down, and will be replaced by Jeremy Wacksman, who most recently worked as chief operating officer. Barton will become co-executive chair of the board, alongside Lloyd Frink.
Smart reads
Buying time SoftBank may be buying back shares. But lasting reversal will depend on an improvement in market conditions and successfully listing portfolio companies, Lex writes.
Meet the tightwads There are some people, who, no matter how much they make, cannot bring themselves to spend money. They’re the tightwads, The Atlantic writes.
Going green An environmentally-conscious US tech start-up secured millions of dollars in government contracts. One problem: it had no climate experience, ProPublica reveals.