Artificial sweetener?

March 3, 2004

Coca-Cola’s (KO) effective income tax rate fell sharply in 2003 to 20.7% from 27.7% in 2002 according to the 10-K the company filed recently. That sharply lower tax rate was the primary reason why Coke was able to report a healthy increase in 2003 earnings, since income before taxes was virtually the same as in 2002. While lowering the tax rate is a good way to sweeten the pot in the short term, it’s not sustainable over the long haul. How much lower Coke can lower its rate remains to be seen. Studies also show that companies with unusually low tax rates tend to underperform those whose rates are in the 30-40% range.

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