At last week’s New Jersey CPA Society’s Business Valuation and Litigation Services Conference, Barry Sziklay (Friedman LLP) gave an update on the huge battle between Coca-Cola and the IRS over transfer pricing that involves the trademark and secret formula for the soda giant’s iconic beverage. Coke is facing a more-than-$3 billion tax bill in a dispute over the valuation method used for determining the royalty charged to suppliers that provide the soda concentrate to bottlers.
Not refreshing: 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 approval came in the form of a closing agreement executed in 1996 between the company and the IRS. Going forward, the company continued to use that transfer pricing method for 11 years with the approval of the IRS. Then, when the IRS audited the company for its 2007-to-2009 tax years, the agency did an about-face 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 (i.e., manufacturers who produce Coca-Cola concentrate using The Coca-Cola Co.’s secret formula, which they, in turn, sell to unaffiliated bottlers who turn the concentrate into the soft drink retailers sell worldwide).
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. 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). In this case, the IRS expert based his analysis on a return-on-assets metric. Result: an approximate more-than-$9 billion increase to the company’s taxable income and a more-than-$3 billion bill for back taxes. The matter went before the Tax Court.
On Nov. 18, 2020, the Tax Court judge ruled in favor of the IRS. Sziklay told the conference audience that, on June 21, 2021, Coca-Cola filed a “motion for reconsideration,” which includes a separate motion requesting that all Tax Court judges rule on the case, not just the one who rendered the original decision. “Stay tuned,” says Sziklay. “This case could end up before the U.S. Supreme Court.”
Sziklay points out that this is a very important case because transfer pricing is becoming ever-more important as the world moves toward a global minimum tax regime as the Organization for Economic Co-operation Development has 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.”
You can find the 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 join the Gift and Estate Tax Valuation Update with Barry Sziklay on October 19.