IRS Claims Coca-Cola Owes $3.3 Billion in Taxes

Just because Coca-Cola markets soft drinks, doesn’t mean it should be soft on paying taxes.

According to an article in the Wall Street Journal, Coca-Cola is facing roughly $3.3 billion in federal income-tax liabilities over foreign transfer licensing. But the soda king isn’t backing down without a fight. Apparently, Coca-Cola is planning to contest the matter and will likely be seeking the services of a top tax lawyer.

“The company firmly believes that the assessments are without merit and plans to pursue all administrative and judicial remedies necessary to resolve this matter,” responded Coca-Cola in a regulatory filing, adding that it plans to file a petition in U.S. Tax Court challenging the tax claims.

The liabilities were found following a government audit, which suggests that the company’s reported income from 2007 to 2009 should have been higher. The issue pertains to how Coca-Cola reports income from foreign licensing, including the manufacture, distribution, and sale of Coke products overseas.

Coca-Cola contends it followed proper protocol regarding the licenses, as outlined in a 1996 agreement with the IRS. Five prior audits confirm that the soda company complied with the agreement, with the most recent audit ending in 2009.


Is Coca-Cola in the wrong or is the IRS money hungry?

Tax attorneys are often called in to represent multimillion and multibillion-dollar companies when accused of committing errors in tax reporting or a tax crime. In some instances, IRS allegations have merit. However, as several tax lawyers can attest to, there are times when high-earning corporations are targeted unjustly solely due to their revenue making potential.

Is this one of those instances? We’ll have to wait to find out. For now, let’s look at the facts.

It has become increasingly common for the IRS to accuse multinational companies based in the United States of transferring profits to countries with lower tax rates. In recent years, the IRS is believed to have filed hundreds of billion-dollar cases against such companies. Some could see this as the IRS cracking down on tax evasion, while others could regard it as the IRS looking for any possible way to collect.

As far as the Coke dispute goes, the IRS is focusing on the way in which the soda company reports profits from its sales of concentrate that are used in the making of its products. Coca-Cola, which has several concentrate plants across the world, sells the concentrate to bottlers in various local markets.

According to Coca-Cola, 57 percent of the company’s $46 billion revenue in 2014 came from sales outside the U.S., but explains it books a higher percentage of operating income overseas. Because of this, the company reported an effective tax rate of 23.6 percent in 2014, which is below the statutory U.S. tax rate of 35 percent.

Though the idea of owing the IRS $3.3 billion is enough to make any regular taxpayer cringe, but for Coca-Cola, it’s merely chump change. The company boasted the title of World’s No.1 brand for 13 years, until it was overtaken by Apple and Google in 2013. As of 2014, Coca-Cola’s net worth was listed at $56.1.


Coca-Cola’s argument

In its filing, Coke argues that it is protected from any penalties if the methodology for licensing follows what is detailed in the 1996 agreement with the IRS. What the exact methodology entails is anyone’s guess at this point.

Though many of these high-profile tax cases tend to be resolved outside of court for a fraction of the original speculated owed amount, it’s probably safe to say that we’ll be hearing a lot more about the case in the upcoming weeks.