In 2023, multinational Coca-Cola faced a legal issue with the U.S. Internal Revenue Service (IRS) related to its Transfer Pricing practices. The company appealed this adverse ruling in 2020 to reverse tax adjustments that could exceed $14 billion.
Background
Between 2007 and 2009, the IRS determined that Coca-Cola allocated excess income to subsidiaries in low-tax countries, thus reducing its U.S. tax burden. The IRS proposed adjustments of more than $9 billion in revenue, resulting in a tax deficiency of more than $3.3 billion.
This issue focuses on Coca-Cola’s profit allocation between the parent company and its foreign subsidiaries, known as “points of supply,” which produce concentrates sold to independent bottlers. The IRS argues that these subsidiaries should receive routine profitability, similar to a maquiladora and that excess profits should be attributed to the parent in the U.S.
Coca-Cola’s Response
Coca-Cola argues that its Transfer Pricing methodology, based on a prior agreement with the IRS from 1987 to 1995, is appropriate. The company claims its foreign subsidiaries own proprietary intangibles and perform significant functions supporting a higher profit share.
Following the 2020 ruling, which upheld the IRS’s position, Coca-Cola appealed the decision. The company intends to raise its arguments before the Eleventh Circuit Court of Appeals, seeking a favorable review.
Tax Implications
If Coca-Cola’s appeal fails, it may incur substantial tax liabilities, the precise amount of which remains dependent on ongoing appeals and future court rulings. This case highlights the importance of proper Transfer Pricing management and the need for clear policies reflecting the economic realities of international operations.
Conclusion
The legal dispute between Coca-Cola and the IRS highlights the difficulties that multinationals encounter when assigning income across different jurisdictions. This case could set precedents for the interpretation and application of the Transfer Pricing rules in the United States.
Keep Informed!
Companies operating worldwide must review and adjust their Transfer Pricing policies. Consult with tax experts to ensure compliance and avoid costly litigation.
Source: Forbes