ECON 230: Milestone 3

Milestone 3: Coca-Cola

Clay Gould

Regent University

Abstract:

In this paper, I will talk about how the policy of the Federal Reserve bank (Monetary policy) as well as the Central bank of its key market, affects the company’s economic growth. I will also talk about the effects of fiscal policies of the home country (United States) and one key market (Europe) on the company and its profitability.

Monetary Policy:

Monetary Policy is the policy of the Federal Reserve bank. According to the Board of Governors of the Federal Reserve System, “Monetary policy in the United States comprises the Federal Reserve’s actions and communications to promote maximum employment, stable prices, and moderate long-term interest rates” (BGFRS, 2021). The primary tool the Federal Reserve uses to conduct monetary policy is the federal funds rate. The Modern Principles of Economics textbook defines the Federal Fund rate as “a short-term interest rate that is largely under the control of the Federal Reserve” (Cowen & Tabarrok, 2021, p. 749). Changes in the federal funds rate influence other interest rates that in turn influence borrowing costs for households and businesses as well as broader financial conditions. The European Central Bank (ECB) manages monetary policy for European countries. According to the European Commission, “the ECB aims to keep price inflation in the euro area below but close to 2% over the medium term. This 2% inflation target is considered optimal for promoting growth and employment” (European Commission, 2021, p. 5).

According to the Board of Governors of the Federal Reserve System’s 2021 Monetary Policy Report, “To avoid sustained periods of unusually low or high inflation, a fundamental aspect of the Federal Open Market Committee's (FOMC’s) monetary policy framework is for longer-term inflation expectations to be well anchored at the Committee’s 2 percent longer-run inflation objective” (BGFRS, 2021, p 4). Over the past 3 years, since inflation rates have been on the rise, the Federal Open Market Committee has decided to implement a monetary policy that contains the fluctuation of the inflation rate. Page 35 of the 2021 Monetary Policy Report states that “Monetary policy abroad remained accommodative, as central banks focused on supporting growth and viewed the recent rise in inflation as transitory” (BGFRS, 2021, p 35). “the Federal Reserve has continued to expand its holdings of Treasury securities by $80 billion per month and its holdings of agency mortgage-backed securities (MBS) by $40 billion per month” (BGFRS, 2021, p 39). This helps to support the flow of credits to businesses and individuals and will remain in effect until significant progression is made to the goals of maximum employment and price stability.

Europe is Coca-Cola’s key market. Europe’s Economic and Monetary Union (EMU) is an organization that is set in place to “support sustainable economic growth and high employment through economic and monetary policy” (European Commission, 2021, p. 1). There are four main economic activities that stem from this. They include “implementing an effective monetary policy for the euro area with the objective of price stability, coordinating economic and fiscal policies in EU countries, ensuring the single market runs smoothly, and supervising and monitoring financial institutions” (European Commission, 202, p. 1).

Fiscal Policies:

A statement from Coca-Cola’s Great Britain tax report from 2020 notes that:

The Company’s business activities around the world incur a substantial amount and variety of business taxes, including corporate income taxes, customs duties, excise taxes, stamp duties, employer portion of payroll taxes, and non-creditable VAT and GST taxes, among others. In addition, we collect and remit other taxes such as employee payroll taxes and creditable VAT and GST taxes. The taxes we pay and collect represent a significant part of our economic contribution to the countries and communities in which our products are sold. (Coca-Cola Great Britain Tax Policy, 2020, para 5-6)

In 2020, Coca-Cola paid €3.8 billion in taxes in Europe, which indirectly employed 374,222 people, and in turn, brought more than 1.6 million customers to the company (Coca-Cola Company Financial Statement, 2020, p. 19). The company also stated, “Finally, taxes paid by us as well as by our suppliers and trade partners make an important contribution to the fiscal budgets of governments in the markets in which we operate” (Coca-Cola Company Financial Statement, 2020, p.18).

Coca-Cola has been accused of packing profits in countries with lower tax codes to avoid the US higher tax rates. “Companies with a single corporate structure are supposed to allocate profit between the parents and a foreign subsidiary…” (Rubin, 2020, para 10). A US tax court judge ruled that Coca-Cola will owe money from 2007 to 2009 for packing profits in Brazil, Ireland, and Egypt (Rubin, 2020).

The tax rates for the Coca-Cola Company differ from the US Federal income tax rate of 21%, due to the “tax impact of significant operating and non-operating items, along with the tax benefits of having significant operations outside the United States and significant earnings generated in investments accounted for under the equity method, both of which are generally taxed at rates lower than the statutory U.S. rate” (Coca-Cola Company income tax quarterly report, 2020, section 13).

In 2020 the Federal Reserve spent $428 million buying debt in individual companies in the first wave of its corporate bond-buying in response to the coronavirus. The Federal Reserve spent $6.6 million on Coca-Cola debt (Sardana, 2020). The Coca-Cola Company also sold $9.5 billion worth of euro-denominated bonds in 2015, which makes it the largest sale by a U.S. issuer ever (Heller, 2015). Mike Cherney from the Wall Street Journal stated that “selling bonds in euros makes sense for companies such as Coca-Cola Co. that have large international footprints, because it allows them to better match liabilities with revenues in the same currency” (Cherney, 2015, para 1). Cherney also noted that “companies can also lower their borrowing costs by selling to a new set of buyers” (Chernery, 2015, para 4).

In an interview with former Coca-Cola CEO, Muhtar Kent, he talks about the disadvantages Coca-Cola and other US-based companies face regarding tax policies. Kent states:

Today, most OECD capital-exporting nations have a territorial tax system for their international companies -- countries such as Australia, Britain, France, Germany, Switzerland, and 21 more. The U.S. is part of a shortlist of countries that actually have a worldwide system in the way it applies tax rules to its international business and gets to a quasi-level playing field through a system called deferral. (Rubenstien, 2010, Para 11)

In other words, while foreign companies get taxed only by the country in which they operate, US-based companies get taxed in foreign countries with which they conduct business, and then the US taxes those profits if the company decides to bring those profits back to the US. Kent also states that “Under proposals now being considered here in the U.S., the benefits of deferral would be further restricted to put U.S. companies at an even greater disadvantage versus their foreign competitors operating under territorial tax systems” ( Rubenstein, 2010, para 14). This poses a clear disadvantage for Coca-Cola and other US companies. With one of the highest corporate tax rates in the world, and operating under a system of foreign income tax that carries a heavier burden than that of any other country, the future of American businesses is on the line.

References:

Cherney, M., & Cox, J. (2015, February 26). Coca-Cola sells $9.5 billion in Euro-denominated Bonds. Retrieved November 29, 2021, from https://www.wsj.com/articles/coca-cola-sells-9-5-billion-in-euro-denominated-bonds-1424992985

Coca-Cola Company statistics and Facts. (2021, October 06). Retrieved November 18, 2021, from https://market.us/statistics/food-and-beverage-companies/coca-cola-company/

Cowen, T., & Tabarrok, A. (2021). Modern principles of economics (4th ed.). Macmillan learning.

Heller, M. (2015, February 27). Coca-Cola joins Euro Bond Rush. Retrieved November 27, 2021, from https://www.cfo.com/capital-markets/2015/02/coca-cola-joins-euro-bond-rush/

Rubenstein, D. (2010, September 8). Archived content. Retrieved November 28, 2021, from https://www.businessroundtable.org/archive/media/news-releases/remarks-by-ceo-muhtar-kent-on-trade-and-global-competitiveness

Smith, D. (2021, September). Rethinking the role of Bonds - Janus Henderson Investors. Retrieved November 28, 2021, from https://www.janushenderson.com/en-gb/investor/article/rethinking-the-role-of-bonds/