Pepsico

Greater Transparency in Tax Reporting

WHEREAS,

“Corporate Income Taxes in the 1990s”, a report published by the well-respected Institute on Taxation and Economic Policy, found that because of a variety of tax breaks, Pepsico’s corporate tax rate over the three-year period ending 1998 was just 4.8%, well below the average rate of 21.7% paid by 250 of the largest American companies, well below rival Coca-Cola’s tax rate of 15.9% and less than one-seventh the statutory corporate tax rate of 35%. In 1998, the last year of the study, only five of the 250 companies studied had a lower tax rates than Pepsico. Despite earning more than $1.5 billion in 1998, Pepsico received a refund from the federal government of $302 million, a negative19.1% tax rate as a result of an IRS settlement pertaining to Puerto Rican tax credits. (Information on the methodolology employed can be found at http://www.ctj.org/itep/corp00pr.htm.)

Pepsico’s low effective corporate tax rate has played a substantial role in the company’s earnings performance. If Pepsico paid taxes at the average tax rate paid by other corporations, its earnings would be significantly lower. Yet shareholders understand very little about the details – and the risks – associated with corporate taxes. For instance, Pepsico derives significant tax benefits from stock option deductions, yet the treatment of stock options is presently under debate in the Congress and could change.

At the same time that Pepsico has been successful in avoiding corporate taxes, it has derived significant benefits from government investments in the success of its business.

Government agencies such as the Overseas Private Investment Organization provide the company financial support for its international operations. Pepsico also benefits from a strong system of trademark protection rights, funded by the government.

During times of national emergency and war, there has historically been a call for shared sacrifice. Pepsico and other corporations may well be called upon to share in the sacrifice and to pay its fair share of the cost of operating the government on which the company depends for its success.

RESOLVED:

That shareholders request that the Board prepare a special report, providing greater transparency on corporate cash taxes paid than is presently available in the Form 10-K or the annual report. Specifically, the report shall explain, in plain language, each tax break that provides the company more than $5 million of tax savings. This report, prepared at a reasonable cost and omitting proprietary information, shall be available to requesting shareholders, no later than August 31, 2003.

Supporting Statement:

Relying on a low corporate tax rate to sustain high earnings entails political risks. As we continue in uncertain times, when corporations are coming under public scrutiny, it is possible that pressure to close corporate tax loopholes will emerge, putting Pepsico’s earnings at risk. In addition, corporate executives are compensated based in part on earnings growth. We believe it would be helpful to shareholders to easily understand how much of earnings growth stems solely from successful corporate tax avoidance.

Please vote FOR this resolution.

Responsible Wealth, 29 Winter Street, 2nd Floor, Boston, MA 02108.
Voice: 617/423-2148 Fax: 617/423-0191.
© 2002 Responsible Wealth. All rights reserved.