The American multinational Coca-Cola has suffered a serious setback in the multi-million dollar tax battle it faces against the US tax agency (the IRS). The United States Tax Court ruled this Wednesday an opinion, published on its website, in which he agrees with the treasury in a key case. It is part of a dispute in which the company is risking more than 14,000 million dollars (13,100 million euros), according to its own estimates, of which it will have to pay about 5,600 million in the short term. Coca-Cola has announced that it will appeal.
The new ruling is complementary to another ruling in 2020. Both refer to transfer prices or the way in which Coca-Cola allocated profits to different subsidiaries. Authorities believe Coca-Cola shifted excess profits to foreign jurisdictions to avoid higher U.S. taxes. The IRS rejected this tax engineering and made adjustments to the tax returns, which the company appealed. The same judge who issued the new ruling agreed with the tax agency in its 2020 opinion, 244 pages long. At that time, the Tax Court reserved its ruling on the effect of Brazilian legal restrictions on the payment of royalties by the Coca-Cola licensee in Brazil until after a similar case regarding the 3M conglomerate was clarified, which was resolved at the beginning of the year. Now, the judge has issued his complementary ruling on Brazil in which he also agrees with the IRS and fully admits the adjustment made by the inspectors to the company’s tax return for the years 2007 to 2009.
After the new ruling is issued, Coca-Cola and the tax agency have time to reach an agreement on the tax impact of both rulings, after which the Tax Court will issue its final resolution on the case. The company will then have 90 days to file an appeal with the Eleventh Circuit Court of Appeals and pay the tax debt and interest corresponding to the years 2007 to 2009.
The initial claim was for 3.3 billion dollars plus interest for those three years. Coca-Cola has recently revised its estimate and in its latest quarterly report registered with the Securities and Exchange Commission estimates that the payment to be made at that time for the years 2007 to 2009 would amount to approximately $5.6 billion, including interest through September 29, 2023, plus additional accrued interest until the moment of payment. Some or all of this amount would be refunded if the company won the appeal.
Furthermore, if the new tax interpretation is extrapolated to subsequent years, “the company estimates that the potential incremental tax and interest liability could be approximately $14 billion as of December 31, 2022,” a figure that would have to be updated with additional interest until the time of payments. And the new tax criteria would have a permanent impact on their accounts. The company estimates that the impact of the continued application of this methodology would have meant an additional $1.2 billion in the first nine months of the year. For future years it would mean an increase in the effective tax rate of approximately 3.5%, according to its latest quarterly report.
It is a very big impact not to fight it to the end, so if the appeals court does not agree, it is most likely that the company will try to go all the way to the Supreme Court, as is implied by the fact that it alleges that the adjustment tax is unconstitutional.
“The Coca-Cola Company disagrees with the actions of the IRS and the latest decision of the United States Tax Court,” the company said in a statement. “While we disagree with the court’s interpretation of the facts and the law in this case, we are pleased to move closer to a final resolution of the Tax Court case so that we can file an appeal, where we can assert our claims and vigorously defend the position of the company. This includes our belief that it is unconstitutional to face retroactive tax liability based on the IRS’s use of a calculation methodology that was different from what was long agreed upon and approved in inspections for more than a decade,” Add.
Curiously, in its defense the company alleged an old precedent from a case of the multinational Procter & Gamble in relation to payments for rights of its Spanish subsidiary. The judge rejects that both cases are comparable and considers that Coca-Cola has not provided evidence to support its arguments.
The American multinational also had problems in Spain due to transfer prices and the Treasury filed various minutes against the company demanding million-dollar amounts. The company paid more than 40 million in 2013 for its discrepancies in corporate tax.
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