Transfer pricing: Coca-Cola faces $4.6bn tax bill

MIKE ESTERL, CHELSEY DULANEY
SEPTEMBER 21, 2015
THE WALL STREET JOURNAL
Coke says it has followed the methodology for the licences outlined in a 1996 agreement with the IRS. Picture: Jonathan Ng Source: News Corp Australia
Coca-Cola says the Internal Revenue Service has notified it of a potential $US3.3 billion ($4.6bn) federal income-tax liability, becoming the latest US multinational challenged over so-called foreign transfer pricing.
The Atlanta beverage giant also disclosed the IRS has recommended the matter be designated for litigation after a government audit determined the company’s reported income from 2007 to 2009 should have been higher.
“The company firmly believes that the assessments are without merit and plans to pursue all administrative and judicial remedies necessary to resolve this matter,” Coke said in a regulatory filing, adding it planned to file a petition in US Tax Court challenging the notice.
Coke said the dispute related to how it reported income from foreign licensing of manufacturing, distribution, sale, marketing and promotion of products in overseas markets. Coke said it followed the methodology for the licences outlined in a 1996 agreement with the IRS. The company’s compliance with the agreement was confirmed by five audits covering the subsequent years through 2006, with the most recent audit ending in 2009, Coke added.
An IRS spokesman declined to comment, citing a federal law prohibiting the IRS from discussing specific taxpayers.
Such disputes, in which the IRS accuses US multinationals of transferring profits to countries with lower tax rates, have become increasingly common in recent years. The IRS is believed to have filed hundreds of such cases totalling tens of billions of dollars, particularly in the technology and pharmaceutical industries.
“It’s almost more common than not to have a transfer pricing dispute with the US,” said Robert Willens, an independent tax consultant in New York.
The IRS dispute with Coke primarily revolves around how the company accounts for profit from its sales of concentrate used to make soda. Coke has several concentrate plants around the world and makes money from selling the concentrate to bottlers in local markets.
Coke says it derived 57 per cent of its $US46bn in revenue last year from outside the US, but it books a higher percentage of its operating income overseas. As a result, it reported an effective tax rate of 23.6 per cent in 2014, below the statutory US tax rate of 35 per cent.
Mr Willens, the tax consultant, said such transfer pricing disputes typically were resolved out of court, typically for a fraction of the amount that the IRS is seeking.
In its filing, Coke said its 1996 agreement with the IRS protected the company from penalties if the methodology was followed. The company didn’t give details.
The company said it didn’t believe the dispute would have a material impact on its results and noted it regularly assessed its tax reserves for such situations.
Top politicians and the White House have been discussing an ambitious overhaul of how the US taxes its multinational firms.