Coca-Cola challenges $3.3bn bill as fizz goes out of tax deal
Coca-Cola thought it had a deal with the US Internal Revenue Service on how much the company charged foreign affiliates for the rights to make and sell Coke products abroad.
Then in September 2015 a letter from the IRS arrived at Coca-Cola's Atlanta headquarters with a bill for back taxes whose amount, $3.3bn (€2.7bn), stunned the world's number one soft drinks maker.
Coca-Cola sued the IRS, disputing the bill. The case is being tried now in the US Tax Court in Washington. A verdict is not expected for some time after the trial ends, expected in mid-April.
The case is being watched closely by tax experts as a sign of rising tension between tax authorities and multinational corporations over transfer pricing, that is, the way companies value the goods, services, trademark and patent rights they constantly move among foreign units across national boundaries.
An important management discipline inside multinationals, transfer pricing is under more scrutiny than ever before from tax agencies worldwide because of strict new global standards, raising legal risks for companies and their investors.
The Coca-Cola case goes to trial as interest among corporations in seeking multi-year deals with the IRS covering transfer pricing arrangements has fallen in the past two years.
Anecdotal evidence suggests the advance pricing agreements (APAs) process, designed to prevent conflict, is under strain in many countries, with some tax lawyers citing Mexico, Italy and China as challenging. Corporate tax directors at a conference in Washington said APAs are taking longer to negotiate and government tax agencies are less willing to do them.
"We're really living in a different time and we can understand why tax authorities might be reluctant because there's a lot more external scrutiny than there ever was," said Amy Roberti, director of global tax and fiscal policy for Procter & Gamble Co, at the conference.
The IRS did not provide answers to questions about the Coca-Cola case and transfer pricing, in general. Coca-Cola said: "The company firmly believes the IRS' claims are without merit and will pursue all available administrative and judicial remedies."
The IRS contends that Coca-Cola charged several foreign affiliates royalties that were too low from 2007 to 2009, which reduced the parent company's US income and resulted in underpayment of its US income taxes by $3.3bn.