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Sunday, May 23, 2004

"Coors Taxes Cut by 90%" - Rocky Mountain News

Coors Taxes Cut by 90%
Rocky Mountain News

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URL: http://www.rockymountainnews.com/drmn/business/article/0,1299,DRMN_4_2905921,00.html

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Pete Coors, who is on unpaid leave as chairman of Adolph Coors Co. while he campaigns for U.S. Senate, holds his grandson recently at a campaign event. Coors is making his political debut while the company is delivering superior cash flow to shareholders through a lower tax bill.

Coors keeps tabs on taxes
Brewer cut bill 90% in 2 years

By David Milstead, Rocky Mountain News
May 22, 2004

U.S. Senate candidate Pete Coors says he's a tax-cutter. Evidence is ample at the Adolph Coors Co., which has cut its federal income tax bill by almost 90 percent in two years.

The company, of which Pete Coors is chairman, has 2003 federal tax expense of just under $8 million on sales of $4 billion and pretax profits of $253.8 million. The tax expense is down from $50 million in 2002 and $74.1 million in 2001.


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The company's Colorado income tax bill has dropped even more dramatically, to just $264,000 in 2003 from $9.9 million in 2002 and $13.8 million in 2001.

That's a 98 percent drop in two years.

The company says it has benefited from a number of new tax-break laws enacted since Sept. 11, 2001, that encourage companies to make capital investments. It also resolved five years' worth of audits and got $7.5 million cred-ited to it in 2003, a company spokesman said.

In addition, the $1.7 billion purchase of the Carling beer brand in Europe in early 2002 provided a number of tax advantages, including an "acquisition structure," which "is generally beneficial from a tax perspective," Adolph Coors Co. tells its shareholders in this year's annual report.

U.S. multinational corporations can use legal, yet controversial, "earnings stripping" tax-management techniques to minimize their total tax bills, including shifting profits and expenses from one country to another.

Adolph Coors Co. is not one of them, says spokeswoman Laura Sankey. "The company follows both the letter and the spirit of the tax laws that pertain to our business."

And to be sure, income taxes are a small part of Adolph Coors Co. overall tax bill; the company paid $1.4 billion in excise taxes on its beer in 2003.

Yet the irony is that while Adolph Coors Co. is delivering superior cash flow to its shareholders through a lower tax bill, it's also writing a smaller check to the Internal Revenue Service at the same time that its chairman, Pete Coors, is making a high-profile political debut in a run for U.S. Senate. Coors is attempting to replace retiring Sen. Ben Nighthorse Campbell, and faces Bob Schaffer in a GOP primary.

Cinnamon Watson, a Coors campaign spokeswoman, directed all questions back to the company, including queries on what Adolph Coors Co.'s tax management means about candidate Pete Coors' views on tax policy.

"It is very complicated," said Jennifer Duffy, Senate editor of the Cook Political Report in Washington, D.C. Coors' opponents, she said, "will try to make it an issue. It would be much more problematic if it involved jobs more than money."

Corporate taxes examined

Scandals that rocked America over the last three years put all corporate behavior under greater scrutiny. Critics noted the notorious Tyco International, where Chief Executive Officer L. Dennis Kozlowski and Chief Financial Officer Mark Swartz were later indicted for alleged corporate looting, re-incorporated itself in Bermuda to avoid paying U.S. corporate income tax.

Then, as the U.S. economy sank, federal budget surpluses swung to deficits and American jobs were lost - sometimes to overseas locations where workers earned a fraction of Americans' pay.

All these factors caused a new look at the amount that U.S. corporations pay in income taxes. A March 2003 article in BusinessWeek noted that in 2002, corporate tax receipts fell to just 1.5 percent of GDP from 2.5 percent in 2000, "far more than any change in the tax rules can explain." Adds the BusinessWeek author: "Tyco and Enron may have been the masters, but it's not just corporate rogues that have taken tax games to new extremes."

Now, these matters are under legislative scrutiny. The U.S. Senate passed a corporate-tax bill May 11 that cut some tax rates and encouraged companies to bring foreign profits home, while closing other loopholes. As they were working on the bill, the General Accounting Office released a study that said more than 60 percent of U.S. corporations reported no income tax liability in 2000.

Current vs. deferred taxes

Investors in Adolph Coors Co. may not even realize the extent of Coors current tax savings, due to the difficulty of evaluating U.S. companies' financial statements.

A quick look at Adolph Coors Co. earnings shows $79.2 million in total income tax expense in 2003. That number is down from 2002, but is actually above 2001 levels.

But this figure has two pieces:

• There's "current tax expense" - the figure that most closely resembles the bottom line on a tax return - of $25.3 million paid to federal, state and foreign governments. Adolph Coors Co. paid the bulk of its current taxes, $17 million, internationally to foreign governments.

• There's also $53.5 million in "deferred tax expense." Deferred tax expense shows up as taxes on a company's income statement, but it isn't yet owed to the IRS or other governments.

When the two are combined, Adolph Coors Co.'s effective tax rate in 2003 is 31.2 percent - below the U.S. statutory level of 35 percent, but still higher than some other U.S. corporations.

"These are not taxes avoided," says Adolph Coors Co. spokesman Dave Dunnewald. "They're only deferred, and they will be paid - otherwise they wouldn't be on the books at all." He also notes that current tax expense is lower in 2003 because of $7.5 million Adolph Coors Co. received by resolving five years' worth of audits.

David L. Brumbaugh, a specialist in public finance for the Congressional Research Service, explained the advantages of deferred taxes in a October 2003 report on tax policy for American companies' foreign earnings.

"In general, deferral poses a tax incentive for U.S. firms to invest in foreign countries with low tax rates," Brumbaugh said. "This is because a tax whose payment can be postponed matters less to a firm than a tax that is paid currently. As long as payment is postponed, a firm can invest and earn a return on what would otherwise be spent on taxes."

The split between Adolph Coors Co.'s current tax expense and deferred taxes highlights the stark differences between financial accounting - the numbers given to shareholders - and tax accounting, the process used to fill out a tax return.

One difference is depreciation. The IRS allows companies to depreciate assets much faster on tax returns than on financial statements. The bigger the depreciation, the smaller the profits - and the fewer taxes owed.

Dunnewald said the company benefited from the "bonus depreciation" created in federal tax law in 2002, then expanded in 2003.

Companies that bought new property after Sept. 10, 2001 - in other words, during the economic slowdown prompted by the terrorist attacks - would get to take a extra depreciation deduction equal to 30 percent of the cost of the property. In last year's tax bill, the bonus depreciation increased to 50 percent for property that was acquired after May 5, 2003, as further incentive for businesses to invest.

Cross-border implications

Colorado is one of only 13 states that allowed the federal "bonus depreciation" on state tax returns, according to CCH Inc., a Chicago-based research company that specializes in tax and business law.

Dunnewald notes that Adolph Coors Co. spent $54 million on a computer system for supply-chain management during this period, and the company paid lower taxes because it received the "bonus depreciation" for the investment.

Less clear is the tax benefit from the 2002 purchase of the Carling brand, although the company describes an "acquisition structure" in its annual report that "is generally beneficial from a tax perspective."

Dunnewald says this refers to the lower statutory tax rate in the U.K.: 30 percent, compared with 35 percent in the U.S.

Subsidiaries of Adolph Coors Co. issued $850 million in debt to partially pay for the U.K. acquisition in early 2002.

The company also entered into a kind of financial derivative known as "cross currency swaps" in which it exchanged debt principal, interest payments, and the currencies of the U.S. and the U.K. Adolph Coors Co. also entered into an intercompany loan between one of its U.S. companies and its U.K. company.

Dunnewald describes the currency-swap arrangement, coupled with the intercompany loan, as a hedge to reduce the volatility of its U.K. profits.

The structure Adolph Coors Co. chose allows the company to hedge the profits without reflecting the swings in its income statement, he added.

These types of structures are also used in tax strategy, notes Selva Ozelli, a certified public accountant and attorney who studies international taxation at RIA, a New York-based provider of software and information to tax professionals.

Ozelli does not study Adolph Coors Co. nor the brewing industry, so she spoke generally. "Intercompany cross border derivative transactions are highly utilized in tax shelter transactions because of the financial disclosure rules relating to derivatives; the difficulties in valuing derivatives; and the uncertain tax treatment of derivatives."

Yet Sankey and Dunnewald say there "are no significant tax benefits to the hedge."

Mark Luscombe, a certified public accountant and attorney who's the principal federal tax analyst for research company CCH, examined the Adolph Coors Co. annual report to the Securities and Exchange Commission and said the currency swap "looks like a more straightforward way of financing the acquisition, using these hedges, that the IRS isn't focusing on."

Adolph Coors Co. is able to take U.S. tax deductions on the $637 million of goodwill it acquired by buying the U.K. business. Goodwill is an intangible asset that represents the extra price paid over the book value of assets acquired. Companies no longer amortize goodwill or reflect it in the income statements, but it's still deductible for tax purposes.

And Adolph Coors Co. has borrowed money in the U.S. - taking on tax-deductible interest payments - to buy a business that makes profits in the U.K.

Adolph Coors Co. owes U.S. taxes on the U.K. profits only if it "repatriates" those earnings back to the U.S. in the form of a dividend to the U.S. company. Until then, it creates another kind of deferred tax on the income statement.

Plus, notes John Bazley, a professor of accounting at the University of Denver, "The more they want to grow the business internationally, the more they need to leave the profits they generate in the country in the U.K. and not take them to the United States."





milstead@RockyMountainNews.com or 303-892-2648. Staff writer Jim Tankersley contributed to this report.


Copyright 2004, Rocky Mountain News. All Rights Reserved.

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