The figure that matters is $20 billion. That is what The Coca-Cola Company and the Internal Revenue Service are fighting over as the dispute heads to a federal appeals court in Miami, in a case The Wall Street Journal reported on June 22 and that traces to how the beverage giant and its foreign subsidiaries reported profits for the 2007 through 2009 tax years under transfer pricing, the accounting method at the heart of the dispute. The bottom line of the fight is almost archaeological: whether a 1996 agreement between the company and the tax agency still means what Coca-Cola says it means.
By the numbers, the mechanics are simple enough to explain at a kitchen table. Coca-Cola’s American parent owns the intellectual property, the recipes, the brand names and trademarks, and licenses it to foreign subsidiaries that manufacture concentrate for overseas markets. Under the 1996 agreement, the company says, it applied what is known as the “10-50-50” method: foreign suppliers keep 10% of gross sales, and the United States parent and the foreign subsidiary split the remaining profit between them. Multiply that structure across years of concentrate sales and the definition of “remaining profit” becomes the entire ballgame.
The arguments, per the court filings. Coca-Cola: “Far from seeking to evade its tax obligations, Coca-Cola carefully structured its operations to adhere to a method that the IRS had repeatedly blessed,” The IRS answers that the 1996 closing agreement looked back only to 1987, never reached the years that followed, and offered at most protection from penalties for using the 10-50-50 method rather than immunity from the method itself. Its filing lands the sharpest line in the case: the “combination of two non-promises does not add up to a promise, as Coca-Cola wishes.”
The ledger so far runs against the company. The IRS won in Tax Court in 2020, a ruling under which Coca-Cola paid $6 billion in taxes and interest after the judge ruled the parent company had improperly structured its arrangements with the foreign units so profits stayed overseas in lower-tax jurisdictions, and the company has kept using the method while the litigation plays out. That is what turns a closed case into a live $20 billion one. If the appeals court sides with Coca-Cola, the $6 billion comes back with interest; if it loses, the IRS has pegged another $14 billion in taxes and interest across the 2010 to 2025 years, a bill that would lift the company’s total exposure to $20 billion.
Investors will note the cash arithmetic. The Journal reported that a $14 billion bill would exceed the cash Coca-Cola has on hand and could push it to borrow to pay the taxman, though analysts say the company is stressing it has the liquidity to cover the bill and keep its dividend intact. The company declined to comment, and the IRS, asked for its side by Fox Business, had nothing to add beyond its filings. Two non-promises, one agreement from 1996, and $20 billion now ride on which reading a panel of appellate judges finds in the paper.
Sources
- Coca-Cola battles IRS in federal appeals court with $20 billion at stake | Fox Business
- Coca-Cola’s $20 Billion Tax Case is Headed to Appeals Court, WSJ Reports
