Coca- Cola Owes $3.3 Billion in Taxes From Foreign Licensing

On September 17, 2015, the Coca-Cola Company received a Statutory Notice of Deficiency (“NOD”) from the IRS for $3.3 billion. The NOD is essentially a notice IRS intends to assess Coca-Cola additional taxes, penalties, and interest arising from an audit.

In this matter, IRS examined Coca-Cola’s tax returns for 2007 through 2009 after a 5 year audit. The issue IRS examined relates to an agreement Coca-Cola entered into with its related company where IRS disagrees with the amount of earnings Coca-Cola reported in the United States versus in other countries with lower tax rates (also known as “transfer pricing”). Transfer pricing is the price charged between related parties, such as a U.S. parent company and its foreign subsidiaries. Companies can manipulate the pricing of their products, services, and intellectual property to earn more profits overseas where they can pay fewer taxes.

Coca-Cola claims IRS’ 2015 adjustment relates to Coca-Cola’s licensing its products in foreign markets. Coca-Cola claims it has followed the same pricing methodology since 1996. In 1996, the company was audited by IRS and a closing agreement was reached. Closing agreements are legally binding. The issue is now whether the company adhered to the same pricing methodology and whether any of the terms of the prior agreement were violated.

The company states the closing agreement included protection for penalties in later years if the same methodology is used. Based on the information released by Coca-Cola, the company intends to aggressively pursue a defense of the company’s current methodology through the administrative appeals process and eventually filing a Petition in United States Tax Court if the matter cannot be resolved. It appears Coca-Cola will elect to go to U.S. Tax Court versus filing a complaint for a refund in District Court or Court of Federal Claims. One benefit to filing a Petition in U.S. Tax Court is that the proposed tax, penalties, and interest do not need to be paid in full before proceeding to court. However, electing to fight your battle in District Court or Court of Federal Claims requires taxpayers to full pay their tax liabilities and then filing a claim for a refund. Here, the proposed tax liability is $3.3 billion, which essentially locks Coca-Cola into U.S. Tax Court if the case cannot be resolved.

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