Coca-Cola bottles in a supermarket in the USA. Mike Blake (Portal)
The American multinational Coca-Cola has suffered a serious setback in its multi-million dollar tax battle against the US Internal Revenue Service (IRS). The United States Tax Court issued an opinion posted on its website Wednesday agreeing with the Treasury Department on an important case. It is a dispute in which the company estimates that it is risking more than 14 billion dollars (13.1 billion euros), of which it has to pay around 5.6 billion in the short term. Coca-Cola has announced that it will appeal.
The new ruling complements another ruling from 2020. Both relate to transfer pricing, or the way Coca-Cola distributes profits among different subsidiaries. Authorities believe Coca-Cola shifted excess profits abroad to avoid higher U.S. taxes. The IRS rejected this tax manipulation and made adjustments to the tax returns, which the company appealed. The same judge who issued the new ruling agreed with the tax agency in his 244-page 2020 ruling. At that time, the Tax Court reserved its decision on the impact of Brazilian legal restrictions on the payment of royalties by the Coca-Cola licensee in Brazil, pending the resolution of a similar case regarding the 3M conglomerate, which was resolved earlier this year. Now the judge has issued his supplementary ruling on Brazil, in which he also agrees with the IRS and fully recognizes the auditors’ adjustment to the company’s tax return for the years 2007 to 2009.
Once the new ruling is issued, Coca-Cola and the tax authority will have time to reach an agreement on the tax implications of both rulings. The tax court will then make its final decision in the case. The company then has 90 days to appeal to the Eleventh Circuit Court of Appeals and settle the tax debt and interest for the years 2007 to 2009.
The original claim was for $3.3 billion plus interest for those three years. Coca-Cola recently revised its estimate, estimating in its most recent quarterly report filed with the Securities and Exchange Commission that the 2007 to 2009 payment to be made at this time would be approximately $5.6 billion would, including interest, until September 29th. 2023, plus additional interest accrued up to the time of payment. This amount would be partially or fully refunded if the company won the appeal.
If the new tax interpretation is extrapolated to subsequent years, “the company also estimates that the potential additional tax and interest liability could be approximately $14 billion as of December 31, 2022,” a figure that will be updated with additional interest by then would have to be the timing of payments. And the new tax criteria would have lasting effects on their balance sheets. The company estimates that the impact of continued use of this method would have been an additional $1.2 billion in the first nine months of the year. For the coming years, this would mean an increase in the effective tax rate of around 3.5%, according to the latest quarterly report.
It is a very big impact not to fight it to the end. So if the appeals court doesn’t agree, the company will most likely try to go all the way to the Supreme Court, which is implied by the fact that it claims that the adjustment tax is unconstitutional.
“The Coca-Cola Company disagrees with the actions of the IRS and the recent decision of the U.S. Tax Court,” the company said in a statement. “Although we disagree with the court’s interpretation of the facts and law in this case, we look forward to moving closer to a final decision in the Tax Court’s case so that we can file an appeal asserting our claims and can vigorously defend the company’s position. “This includes our belief that it is unconstitutional to incur retroactive tax liabilities when the IRS uses a calculation method that differs from the method long agreed upon and approved during more than a decade of inspections,” he added.
Curiously, the company cited in its defense an old precedent from a case brought by the multinational Procter & Gamble regarding payments for rights of its Spanish subsidiary. The judge rejects the comparability of the two cases and considers that Coca-Cola did not provide any evidence to support its arguments.
The US multinational also had problems in Spain due to transfer pricing and the Ministry of Finance filed several reports against the company demanding millions of dollars. The company paid more than 40 million in 2013 for its corporate tax discrepancies.
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