Share a Coke with the IRS
Coca Cola has earned a lot of headlines for their “Share a Coke with . . . ” marketing campaign, printing bottles and cans with 1,000 of the most popular names in the country, along with nicknames like “Mom,” “Dad,” Soulmate,” and “BFF.” You can even go online to customize your own bottle for just five bucks. (Just imagine the possibilities . . . “Share a Koke with a Kardashian” for reality-TV wannabes, or “Share a Diet Coke with Your Yoga Instructor” for fitness fanatics? The Center for Science in the Public Interest even created a “Share a Coke with Obesity” can.)
Last week, our friends at the IRS decided to open a little happiness of their own. And apparently, they want more than just a can or two of fizzy sugar water. On Friday, Coca Cola Enterprises filed a Form 8-K with the Securities and Exchange Commission revealing that, after a five-year audit, the IRS is dunning them for $3.3 billion in extra taxes. Plus interest! (Fun fact: the audit covered just three tax years from 2007-2009. That means the IRS spent more time auditing Coke’s income than Coke spent earning it!)
The issue centers on “transfer pricing,” which governs how businesses set prices between controlled or related entities. Let’s say Coca Cola sells a bottle of their delicious Vanilla Coke in Bermuda. (That sounds especially delicious, right?) How much of their profit should be taxed in Bermuda, where the average effective tax rate for multinational corporations is just 12%? And how much of it should be taxed back here in the U.S., where the rate tops out at 35%? That may not sound like a huge difference on something you can buy for a pocket change at a highway rest stop. But Coca Cola sells a lot of beverages — $46 billion worth last year. And 57% of that revenue comes from international markets.
With all that money sloshing back and forth across international borders, you can see how shifting tax rates on a few cents of income per drink can really add up. Transfer pricing issues may sound boring (and they are), but they’re a big deal. The very serious lawyers who specialize in these sorts of disputes work out of stuffy offices in high-rent big-city buildings, and they’ve never even heard of casual Fridays.
Naturally, the folks at Coke don’t think it will be especially refreshing to send the IRS an extra $3.3 billion:
“The Company has followed the same transfer pricing methodology for these licenses since the methodology was agreed with the IRS in a 1996 closing agreement that applied back to 1987. The closing agreement provides prospective penalty protection as long as the Company follows the prescribed methodology, and the Company has continued to abide by its terms for all subsequent years. The Company’s compliance with the closing agreement was audited and confirmed by the IRS in five successive audit cycles covering the subsequent 11 years through 2006, with the last audit concluding as recently as 2009.”
Coke says they plan to file a notice challenging the deficiency in Tax Court. They’ve reassured shareholders that they have “adequate tax reserves,” which means they can pay up if they lose. And if all else fails, they’ve got that secret formula locked up in a vault in Atlanta. That’s got to be good for something, right?
Here’s the bottom line. Coke makes billions of dollars a year. But they understand it’s what they keep that counts, and they’re willing to fight to keep more. Shouldn’t you be working for the same goal? So call us for a plan, and pay for your next Coke with the savings. It’s the real thing!
In The Headlines
Mylan Makes an Allergy Blockbuster from a ‘Has Been’ Product
In a 2007 purchase of medicines from Merck KGaA, drugmaker Mylan picked up a decades-old product, the EpiPen auto-injector for food allergy and beesting emergencies. Management first thought to divest the aging device, which logged only $200 million in revenue. Then, Heather Bresch, now Mylan’s Chief Executive Officer, hit on the idea of using old-fashioned marketing, in part to boost sales among concerned parents of children with allergies. That started EpiPen, which delivers about $1 worth of the hormone epinephrine, on a run that has resulted in its becoming a $1 billion-a-year product that far outpaces its rivals and provides about 40% of Mylan’s operating profits, says researcher ABR|Healthco. EpiPen margins were 55% in 2014, up from 9% in 2008, ABR|Healthco estimates. How Mylan pulled that off is a textbook case in savvy branding combined with a massive public awareness campaign on the dangers of child allergies. Along the way, EpiPen’s wholesale price rose roughly 400% from about $57 each when Mylan acquired the product. “They have done a tremendous job of taking an asset that nobody thought you could do much with and making it a blockbuster product,” says Jason Gerberry, a Leerink Partners analyst.
But while EpiPen has given countless parents a sense of security that their children can go out in the world safely, the device’s soaring price—up 32% in the past year alone—has forced some families to make difficult choices in order to afford the life-saving medicine. The price increases are among the biggest of any top-selling brand drug, according to DRX, a unit of Connecture that tracks drug pricing. After insurance company discounts, a package of two EpiPens costs about $415, DRX says. By comparison, in France, where Meda sells the drug, two EpiPens cost about $85. “There is a danger with that,” says George Sillup, chairman of the pharmaceutical and health-care marketing department at Saint Joseph’s University. If the company raises the price too much, “that could create some backlash.” The company sees it differently. “Mylan has worked tirelessly over the past years advocating for increased anaphylaxis awareness, preparedness, and access to treatment,” Mylan spokeswoman Nina Devlin said in a statement. She said the company does not control final retail prices for EpiPen and offers coupons that eliminate co-pays for most patients. Bresch declined to comment for this story.
The CEO has made no secret of her strategy to increase demand for EpiPens by getting them stocked for emergency use in more schools and other public places. So-called entity prescriptions allow for this. “We are continuing to open up new markets, new access with public entity legislation that would allow restaurants and hotels and really anywhere you are congregating, there should be access to an EpiPen,” Bresch said at a recent conference. Over the past seven years, Mylan has hired consultants who had worked with Medtronic to get defibrillators stocked in public places. Bresch, the daughter of Senator Joe Manchin (D-W.VA.), turned to Washington for help. Along with patient groups, Mylan pushed for federal legislation encouraging states to stock epinephrine devices in schools.
In 2010 new federal guidelines said patients who had severe allergic reactions should be prescribed two epinephrine doses, and soon after Mylan stopped selling single pens in favor of twin-packs. At the time, 35% of prescriptions were for single EpiPens. The U.S. Food and Drug Administration had changed label rules to allow the devices to be marketed to anyone at risk, rather than only those who had already had an anaphylaxis reaction. “Those were both big events that we’ve started to capitalize on,” Bresch said in October 2011. In 2013, the year following the widely publicized death of a 7-year-old girl at a school in Virginia after an allergic reaction to peanuts, Congress passed legislation encouraging states to have epinephrine devices on hand in schools. Now 47 states require or encourage schools to stock the devices.
Since 2012, Mylan has helped popularize its brand by handing out free EpiPens to more than 59,000 schools. Last year it signed a deal with Walt Disney to stock EpiPens in Disney’s theme parks and on cruise ships. And Mylan spent $35.2 million on EpiPen TV ads in 2014, up from $4.8 million in 2011, according to researcher Nielsen. Mylan disputes the ad spending figures but declines to offer alternatives. In part because of Mylan’s efforts, the number of patients using EpiPen has grown 67% over the past seven years. Many kids with allergies own multiple sets, for school and home. And for doctors, who write prescriptions for the name they know best, the EpiPen brand “is like Kleenex,” says Robert Wood, a pediatric allergist at Johns Hopkins University School of Medicine.
So far rivals have not been able to break Mylan’s market grip. Sanofi’s Auvi-Q, introduced in 2013, is in the shape of a credit card and—unlike EpiPen—gives step-by step audio instructions. But Sanofi priced Auvi-Q about the same as EpiPen, and the product struggled initially to gain insurance coverage. Sanofi says 9 out of 10 patients with commercial insurance can now receive coverage for Auvi-Q prescriptions. Yet in the first half of 2015, EpiPen had about an 85% share of epinephrine prescriptions vs. only 10% for Auvi-Q, according to Symphony Health Solutions data.
Still, allergy sufferers without generous health benefits feel the pain. Denise Ure, a social worker in Seattle, has a peanut allergy so severe that the last time she ingested a nut crumb in 2011, she needed three EpiPens and was hospitalized. Ure says she cried last year when she found out a prescription for two EpiPens would cost her about $350. “I was terrified because there’s this life-saving medicine that I needed, and I couldn’t afford it,” she says. Ure now carries two EpiPens she got in Canada, where they cost about half as much. The biggest threat to EpiPen could come from Teva Pharmaceutical Industries. It settled a patent lawsuit in 2012 allowing it to market a generic version of EpiPen as early as this year, if it wins FDA approval. Mylan is not too worried. Predicted Bresch in August: “You would not see the traditional market loss because of just the brand equity with EpiPen.”
Citations
1. http://bloom.bg/1Wiu6Lh – BusinessWeek
Uber Places a Big Bet for Future Growth in China
Uber has never been shy about making big bets, and so, in true Uber form, it has recently made another huge one. It is called UberCommute and is described on the company’s blog as “carpooling at the press of a button.”
UberCommute is designed to pair drivers with riders traveling along similar routes. The basic vision is that a driver heading to work, or running an errand, or otherwise traveling in a given direction will log into the app and pick up a passenger heading the same way. In a first for a to-be global product, Uber has chosen to develop and pilot UberCommute not in the United States but in Chengdu, China, which it calls its biggest city.
Uber launched in China in February 2014 before setting up shop that August in Chengdu, the main urban area of which has a population of 4 million to 5 million, depending on whose data you’re citing. This June, Uber CEO Travis Kalanick disclosed in a letter to investors that all of Uber’s Chinese cities—but in particular Chengdu—were growing at a truly fantastical rate. After its first nine months on the market, Kalanick wrote, Chengdu alone was doing 479 times as many trips as New York City had at the same age. Yes, 479.
Combine those Chengdu population estimates with that towering growth figure and you get a city with a lot of liquidity, which for a product like UberCommute is very important. Most of Uber’s services depend on what the tech and venture capital communities lovingly refer to as “network effects,” i.e. the principle that the more people use something, the more valuable it becomes. This is presumably one explanation for why Uber has been so aggressive in its expansion—as the number of people riding with and driving for Uber increases, so does the strength and stability of its platform, in a sort of perpetual supply-and-demand feedback loop.
Since UberCommute is being conceived of first and foremost as an “entirely new product for drivers,” the market’s liquidity is especially important. The crucial inversion of UberCommute is that instead of supporting riders who are going somewhere and need a driver, it is designed for drivers who already have a destination in mind and are willing to bring along a passenger.
On the surface it might sound very much the same, but in practical terms it means that the drivers on UberCommute are going to have a much lower tolerance for going out of their way to pick someone up than the typical Uber driver looking for a fare. What exactly that tolerance is, Uber doesn’t know yet. What the company does know is that for UberCommute to work, it will need a ton of drivers and a ton of riders, so that drivers who may not want to deviate very far from their paths are in fact able to find a passenger. Hence why liquidity is key.
Uber currently seems to have two strategies for ginning up sufficient interest in UberCommute. The first is playing up in promotional materials how UberCommute promises to improve the well-known congestion problems in Chinese cities, providing a “real alternative to a world that looks like a parking lot and moves like a traffic jam.” The second is making UberCommute ultra-ultra-cheap. I say ultra-ultra because People’s Uber, the UberX-like platform that Uber offers in China, is already heavily subsidized by Uber (on an almost unfathomable scale) and therefore ultra-cheap. UberCommute will be even cheaper—and so for Uber, which currently isn’t taking a commission on the service, in the short run even more expensive. But in the long run, if UberCommute catches on, it could also be ultra-ultra-successful.
Citations
1. http://read.bi/1NVQ5Vi – Business Insider
2. http://for.tn/1VhFtWH – Fortune
The Good News Is . . .
• The Commerce Department says new-home sales surged 5.7% last month to a seasonally adjusted annual rate of 552,000. That followed an even bigger 12% jump in July, according to the government’s revised figures. Healthy hiring and smaller price increases for new homes have begun pushing up sales. New home sales have risen nearly 22% in the past year. Strong gains in new home sales could accelerate the economy by boosting home building, creating demand for building materials, and generating more spending on landscaping and other services.
• Nike, Inc., world’s leading designer, marketer and distributor of athletic footwear, apparel, equipment and accessories, reported earnings of $1.34 per share, an increase of 22.9% over year earlier earnings of $1.09 per share. The firm’s earnings topped the consensus estimate of analysts by $0.15. The company reported revenues of $8.4 billion, a 5.4% increase. Management attributed the company’s results to the continued strength of its Nike brand, improved gross margins, and a greater contribution to earnings from its international operations.
• The German chip maker Dialog Semiconductor has agreed to buy Atmel, an American rival, for about $4.6 billion, adding to a wave of deal-making in the sector as firms seek alternatives to saturated mobile phone markets. Dialog said that the deal would diversify its client base in automotive markets as well as in network-connected chips used in industrial gear. Atmel shareholders will receive $4.65 in cash and 0.112 of a Dialog Semiconductor American depository share for each Atmel common share.
Citations
1. http://bit.ly/1PIdfh3 – US News & World Report
2. http://cnb.cx/1gct3xa – CNBC
3. http://swoo.sh/1OWoioC – Nike, Inc.
4. http://nyti.ms/1Vkr2Mj – NY Time Dealbook
Planning Tips
Guidelines for End of Year Financial Planning
With the New Year a mere three months away, you may already be thinking about your 2016 resolutions. A better plan? Focus on your current finances. By employing smart strategies now, you could see a reduction in your April tax burden, as well as a boost in your retirement and college savings, thus starting off 2016 on the right financial footing. Below are some end-of-year financial moves to help you achieve that goal. Be sure to consult with your financial advisor before undertaking any changes in your current financial plan.
Rebalance your portfolio – Has it been a while since you took a close look at your investments? Due to changes in the market—notably its recent volatility—most investors find that over the course of the year, their allocations may no longer match their risk tolerance. Should you need to sell investments in non-tax-sheltered accounts at a loss, do so before December 31st to lower your tax bill. You can buy the stock back, but you will have to wait 30 days in order to claim it for tax purposes.
Maximize your retirement account contribution – If you contribute to a 401(k), you still have time to increase your savings rate before the year’s end. If you are under 50 years old, you can contribute up to $18,000, an increase of $500 over last year. And those 50 and older can contribute up to $24,000. If you are a high earner, there is even more incentive to up your contributions this quarter. Social Security withholdings are capped at $118,500 for 2015, so any dollar you make above $118,500 is free of the Social Security tax. Another option: Contribute to a Roth IRA. You can contribute $5,500 for the year, or $6,500 if you are 50 years old or older. Adjusted gross income limits for Roth IRAs for 2015 are $131,001 for singles, or $193,001 for couples. That money grows tax-free—you will not owe taxes on it when you take distributions out in retirement, as long as it has been there for five years or more.
Contribute to your 529 plan – Funding your child’s college account not only supplies them with much-needed cash come matriculation time, it also acts as a tax break. That is because contributions grow tax-free, and depending on your state, individual and joint contributions are tax-deductible. What is more, grandparents can combine their $14,000 annual gift limit up to five years in advance, meaning they can put $70,000 in a 529 account at once without incurring federal gift taxes, and that money will grow tax-free. There is currently a $14,000 annual gift tax exclusion, so a grandparent can “gift” that amount annually without incurring the gift tax.
Review your beneficiaries – Even the most organized people neglect to update their employer benefits after they get married, divorced, or have kids. Do not fall into this habit. Conduct a beneficiary audit. Have you changed jobs and now have a new 401(k) or life insurance policy? Have you opened a new IRA or updated your will? If so, it is important to review all of your accounts where you have a beneficiary listed, including IRAs, 401(k)s, and life insurance policies, and ensure you have the right loved ones listed.
Make your charitable donations – If you want to reduce your 2015 tax liability, you must make donations that can be itemized before December 31st. If you have any stock that has appreciated over the years and you want to sell that without incurring capital gains, you may think about donating it, thereby avoiding a tax bill and gaining the ability to deduct the appreciated amount. Of course, be sure to vet the charities you have in mind and double-check that your intended donations are indeed tax-deductible. And always get a receipt.
Citations
1. http://bit.ly/1x58M2W – US News & World Report
2. http://bit.ly/1KZa8BC – FinancialPlanning.com
3. http://cnb.cx/1KEjWPQ – CNBC
4. http://aol.it/1BgplHb – DailyFinance.com
5. http://bit.ly/1RaqrMG – Zacks.com
