Coca-Cola was notified by the IRS that it owes $3.3 billion more in federal taxes, as well as interest, for 2007 to 2009, the company said.
The Atlanta-based company said in a regulatory filing it believes the assessments from the Internal Revenue Service are without merit and plans to pursue “all administrative and judicial remedies necessary to resolve the matter.”
The maker of Sprite, Dasani, Powerade and other drinks says the disagreement is over how much it should report as taxable income in the U.S., in relation with licensing that allows foreign affiliates to sell products like soft drink concentrates to bottlers overseas.
It’s a tax issue that comes up frequently for multinational companies, said Robert Willens, president of a tax accounting consultancy in New York. He said companies tend to charge foreign subsidiaries low licensing fees as a way to shift reportable income away from the U.S., where corporate tax rates are higher. Willens said the cases are often settled for a fraction of the assessment.
“They hardly ever get to court, because neither party wants to experience the hazards of litigation,” he said.
In a filing with the Securities and Exchange Commission, Coca-Cola said it has used the same methodology for determining its taxable U.S. income for nearly 30 years.
“The IRS now seeks to depart from this long-standing practice in order to increase substantially the amount of tax,” the company said.
Coke disagrees with the filing, saying:
The Company has followed the same transfer pricing methodology for these licenses since the methodology was agreed with the IRS in a 1996 closing agreement that applied back to 1987. The closing agreement provides prospective penalty protection as long as the Company follows the prescribed methodology, and the Company has continued to abide by its terms for all subsequent years. The Company’s compliance with the closing agreement was audited and confirmed by the IRS in five successive audit cycles covering the subsequent 11 years through 2006, with the last audit concluding as recently as 2009.
In afternoon trade on Friday, Coke shares were down 0.8%.