The Coca-Cola Company is disputing a $3.3 billion tax bill related to transfer pricing. The case in U.S. Tax Court is being watched by tax experts and is considered a sign of increasing tension between tax authorities around the world and multinational corporations.
According to media reports, Coca-Cola states in court filings that the IRS approved the company’s method for setting its transfer prices based on how much the company charged foreign affiliates for the rights to make and sell Coke products abroad. But the company claims that the IRS later withdrew that approval and issued the bill for back taxes. The agreement with the IRS was not an Advance Pricing Agreement (APA), but was described as an APA-like “audit closing agreement,” which was reaffirmed in later audits.
An APA is an agreement between the IRS and a taxpayer determining a transfer pricing method for a transaction. The IRS developed the APA program to resolve highly factual transfer pricing issues in a principled, cooperative manner. A taxpayer voluntarily participates in the program in exchange for the IRS limiting its discretion to make transfer pricing adjustments.
In September 2015, Coca-Cola received a letter from the IRS with a bill for $3.3 billion in back taxes. The IRS contends that Coca-Cola charged several foreign affiliates royalties that were too low from 2007 to 2009, which reduced the parent company’s U.S. income and resulted in underpayment of its U.S. income taxes by $3.3 billion.
Coca-Cola sued the IRS, disputing the bill. The case is being tried now in the Tax Court. A verdict is not expected until some time after the trial ends.
Transfer pricing is under more scrutiny than ever before from tax agencies worldwide because of strict new global standards, which raise legal risks for companies and their investors. The Coca-Cola case goes to trial as interest among corporations seeking multiyear deals with the IRS covering transfer pricing arrangements has fallen in the past two years.
The IRS states that it received 101 applications in 2017 for APAs, and 98 in 2016, both well below the 2015 peak of 183. According to reports, anecdotal evidence suggests that the APA process, designed to prevent conflict, is under strain in many countries, with some tax lawyers citing Mexico, Italy and China as challenging. Corporate tax directors have complained that APAs are taking longer to negotiate and government tax agencies are less willing to engage in them.