Coca-Cola has announced its decision to pay $6 billion in back taxes and interest to the IRS while simultaneously preparing to appeal a US Tax Court ruling.
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The dispute between Coca-Cola and the IRS began in 2007 with the case officially reaching the US Tax Court in December 2015.
The IRS challenged the company’s method of calculating its US taxable income focusing on the profits made by the company’s foreign affiliates from 2007 to 2009.
Judge Albert Lauber of the US Tax Court issued a ruling on July 31, 2024, determining that Coca-Cola owed $2.7 billion in back taxes plus an additional $3.3 billion in interest, totaling $6 billion.
The IRS accused Coca-Cola of failing to accurately report its income from foreign subsidiaries, alleging the company’s pricing strategy did not adhere to arm’s length principles.
According to the IRS, Coca-Cola’s approach allowed the company to underreport US taxable income which led to a tax shortfall over the specified years.
The company has argued that it has followed the same method for calculating taxable US income from foreign affiliates for nearly 30 years.
The company believes the IRS and the court misinterpreted and misapplied the applicable regulations concerning the allocation of income from foreign licensees.
The company remains confident that it will prevail upon appeal, arguing that its pricing methodology has been consistent and compliant with existing tax laws.
US Tax Court Judge Albert Lauber’s brief ruling addressed that Coca-Cola owes the IRS $2.7 billion in back taxes with interest bringing the total to approximately $6 billion.
As part of the appellate process Coca-Cola has agreed to pay the $6 billion encompassing both the principal and interest.
In its recent quarterly report to the Securities and Exchange Commission (SEC), Coca-Cola mentioned that some or all of the $6 billion, plus accrued interest could be refunded if the company succeeds in its appeal.
The legal battle began in December 2015 when Coca-Cola received a notice from the IRS claiming that the company owed an additional $3.3 billion in federal taxes and interest for the years 2007, 2008, and 2009.
The IRS challenged Coca-Cola’s method of calculating taxable US income from its foreign affiliates, alleging an underpayment.
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For nearly three decades the company used a specific methodology to allocate income earned by its foreign affiliates. This approach had been accepted by the IRS until the sudden re-evaluation for the years in question.
The case was brought before the US Tax Court with proceedings starting in 2015. After a lengthy trial, the court ruled against Coca-Cola in November 2020 supporting the IRS’s position.
US Tax Court Judge Albert Lauber issued a two-sentence decision on July 31, 2024, effectively finalizing the court’s stance.
The ruling concluded that the company must adhere to the IRS’s recalculated tax obligations for the years 2007-2009.
The back taxes amount to $2.7 billion. When combined with accrued interest, the total liability reaches approximately $6 billion. Coca-Cola has committed to paying this amount while pursuing its appeal.
The company has been preparing for financial repercussions since the Tax Court’s initial decision in 2020. The company set aside reserves of $438 million, which were later increased to $456 million following an updated analysis on June 28, 2024.
The IRS may apply the same methodology to subsequent years (2010-2023) resulting in an additional tax and interest liability of up to $16 billion.
Shares of Coca-Cola experienced a slight decline of 0.2% in late-morning trading following the announcement of the $6 billion payment.
The company has 90 days to file its appeal with the US Court of Appeals for the Eleventh Circuit. The company intends to contest the IRS’s reallocation of income from foreign affiliates, arguing that the IRS altered its methodology without prior notice.
The company asserted that the IRS misinterpreted and misapplied the applicable regulations leading to an unjust reallocation of income.
The company spokesperson Scott Leith declined to provide additional comments beyond the official statement.
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