Coca-Cola has been hit with a bill for $3.3 billion in back taxes, but the company says it’s not paying because it followed the rules.
In a regulatory filing Friday, the Atlanta-based beverage giant said the IRS, after conducting a five-year audit of the company, concluded that Coke owes that amount — plus interest — on underreported taxable income from 2007 to 2009.
The dispute relates to income generated by foreign subsidiaries that make, distribute and sell Coke products, which include Dasani water and Powerade sports drinks in addition to its core soft drinks, under license.
Coke, however, said it has followed guidelines set by the IRS in 1996 for what is known as “transfer pricing” of licensing fees and that the IRS itself confirmed the company’s adherence to the rules in previous audits.
It’s a tax issue that comes up frequently for multinational companies, Robert Willens, president of a tax accounting consultancy in New York, told the Associated Press. 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.
Typically, Willens said, the cases are settled for a fraction of the amount of the assessment.
“They hardly ever get to court, because neither party wants to experience the hazards of litigation,” Willens told the AP.
Tax experts say global companies often can shift profits to overseas units with lower tax rates by using transfer pricing.
Typically, the subsidiary makes big profits but pays little or no taxes, while charging high prices to the parent company and its other units, reducing their taxable profits and tax bills.
Transfer pricing has become an issue as governments reassess taxable incomes when companies transfer money between the entities they own. Other companies that have faced adjustments include Amazon, Microsoft and Caterpillar facing adjustments.
The company said it will fight the assessment.
“The IRS formally agreed to this methodology for the Company’s 1987-1995 tax returns and subsequently approved the methodology during five successive audits through tax year 2006,” Coke said in a statement.
“The IRS now seeks to depart from this long-standing practice in order to increase substantially the amount of tax. We are among hundreds of other companies currently facing these types of adjustments involving payments between related companies, and we will vigorously defend our position.”
The IRS, in a statement Friday, said it cannot discuss specifics of a corporate audit, “based on federal disclosure regulations and federal law. Furthermore, it would be inappropriate for the Internal Revenue Service to provide comment on any real examples, hypothetical examples or suppositions regarding a taxpayer or taxpayers.”
Coke said it is not being assessed penalties on the disputed back taxes.
Coca-Cola has been adept at whittling its tax bill compared to many companies, an analysis last year by the Atlanta Journal-Constitution of its and other big Georgia companies’ tax disclosures showed.
From 2008 to 2013, the AJC found, the global giant paid $3.3 billion in federal taxes – less than 5 percent of its $65 billion in global pretax profits during that period. The tax figures were based on Coca-Cola’s disclosures of its “current” federal tax expenses, which excludes tax payments that are indefinitely postponed by tax breaks.
About 80 percent of Coca-Cola’s business is overseas, where most countries have lower tax rates than the U.S.’s federal corporate tax rate of 35 percent.
Coke had profit of $7.1 billion in 2014. But while 83 percent of its taxable income came from overseas units, its foreign tax bill was less than 58 percent of its total.
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