Coke faces a more-than-$US 3 billion tax bill in a dispute over the valuation method used to determine the royalty charged to suppliers that provide the soda concentrate to bottlers—and the result of the case would impact transfer pricing taxes globally, given the brand’s reach. The US litigation will be an interesting case study with trademark valuation and transfer pricing implications in the UK and elsewhere.

US-based CPA Barry Sziklay (Friedman LLP) gave an update last week to the New Jersey Society of CPAs on Coca-Cola’s current “comparable profits method” for sharing gross sales between the parent company, international manufacturers of their syrup (supply points), and retailers. Sziklay said:

• From 1996 to 2007, Coca-Cola had been using a “10-50-50” method that the IRS had approved in the wake of the agency’s audit of the company for the years 1987 to 1995. The 10-50-50 method permitted the supply points to retain as profits 10% of their gross sales, with the balance of the profit split 50-50 between the parent company and the supply points.
• Then, the IRS audited the company for its 2007-to-2009 tax years and rejected the 10-50-50 method in favor of the “comparable profits method” for apportioning income between the U.S. parent company and its foreign supply points (which they, in turn, sell to unaffiliated bottlers worldwide). The comparable profit method (set forth in U.S. Treasury Reg. Sec. 1.482-5) attempts to determine an arm’s-length apportionment result based on the amount of operating profit an uncontrolled “comparable” company would earn in comparison to the subject company (The Coca-Cola Co. and subsidiaries).
• Applying the new method, the IRS valuation expert calculated a more-than-$3 billion bill for back taxes. On 18 November 2020, the US Tax Court judge ruled in favor of the IRS. Sziklay told the conference audience that, on 21 June 2021, Coca-Cola filed a “motion for reconsideration.”

Sziklay believes “this case could end up before the U.S. Supreme Court,” with implications for the UK and the global minimum tax regime as the Organization for Economic Co-operation Development articulated in its July 2021 issuance of OECD/G20 Base Erosion and Profit Shifting Project, “Addressing the tax challenges arising from the digitalisation of the economy.”

BVWire—UK readers can find the US Tax Court opinion and continuing coverage on BVR’s BVLaw platform. The case is: Coca-Cola Co. v. Comm’r, 155 T.C No. 10 (Nov. 18, 2020). Also, BVR is providing a Gift and Estate Tax Valuation Update with Sziklay on 19 October.