Soft drink manufacturer Coca-Cola has been ordered by a court to make billions in payments to the Internal Revenue Service (IRS) to cover back taxes.
On July 31, the U.S. Tax Court ruled that there were deficiencies in income tax dues payable by Coca-Cola to the IRS for the 2007–09 period to the tune of approximately $2.7 billion. Adding in interest, the total amount payable by Coca-Cola comes to around $6 billion, the company said in an Aug. 2 press release.
Coca-Cola said it will defend its position and criticized the decision, stating “the IRS and the Tax Court misinterpreted and misapplied the applicable regulations involved in the case.”
With 90 days to file a notice of appeal, Coca-Cola intends to pay the roughly $6 billion owed while it proceeds with the appeals process.
The issue stems from a notice sent by the IRS to Coca-Cola in September 2015, in which the agency sought $3.3 billion in additional income tax for 2007–09.
The IRS said in the notice that it would reallocate more than $9 billion in income from the company’s accounts, thus resulting in the tax dues. The soft drinks manufacturer claimed the reallocation violated a previous calculation methodology that was agreed upon by both sides.
The IRS designated the issue for litigation, taking away any alternative means for Coca-Cola to resolve the matter other than by going to court, the firm said.
In 2020, the Tax Court issued an opinion siding with the IRS. Three years later in November 2023, the court issued a second opinion which was also in favor of the tax agency.
“The company believes it will prevail on appeal with respect to the issues raised in both the 2020 and 2023 Tax Court opinions,” Coca-Cola stated.
Transfer Pricing Issue
The 2015 notice sent by the IRS to Coca-Cola was related to transfer pricing, an accounting practice in which goods and services are exchanged between different divisions of the same company. The practice is used by firms to minimize the overall tax burden of the parent company.
In a recent quarterly statement filed with the U.S. Securities and Exchange Commission (SEC), Coca-Cola revealed that the 2015 IRS notice concerned “transfer pricing between its U.S. parent company and certain of its foreign affiliates.”
Back in 1996, the IRS and Coca-Cola agreed on a methodology to determine U.S. taxable income to resolve the transfer pricing issue, the filing said. The agency also audited the company’s compliance with the agreement in five audit cycles between 1996 and 2006.
In the 2015 notice, the IRS “retroactively rejected” this methodology for calculating taxes for 2007–09, introducing an “entirely different methodology without prior notice to the Company.”
It is through the new calculation methods that the IRS reallocated more than $9 billion in income to the U.S. parent company from its foreign licensees, thus resulting in additional taxes.
“The Company believes that the retroactive imposition of such tax liability using a calculation methodology different from that previously agreed upon by the IRS and the Company, and audited by the IRS for over a decade, is unconstitutional,” Coca-Cola argued.
The firm noted that if it wins the appeal, the business should be refunded the approximately $6 billion it plans on paying to the IRS.
The U.S. Tax Court’s decision comes as the IRS announced an initiative back in October that targets transfer pricing practices of American subsidiaries of foreign companies that distribute goods in the United States.
“These foreign companies report losses or exceedingly low margins year after year through the improper use of transfer pricing to avoid reporting an appropriate amount of U.S. profits,” the agency said.
It accused foreign firms of not paying “their fair share of tax on the profit they earn” from U.S. subsidiaries.
The IRS aims to “crack down on this strategy” and is sending compliance alerts to around 150 subsidiaries of large foreign corporations to “reiterate” their tax obligations in America, the agency said at the time.
