Coca-Cola Shakes Up $20 Billion Tax Dispute

Coca-Cola has had a major tax dispute chilling in the freezer for more than a decade, and this week, a federal appeals court will hear arguments that’ll lead to either the case exploding in a financial mess for multinational companies — or Coke setting itself up for a win. A total loss would pin a bill on Coke for more than its net income last year and raise its effective tax rate this year. 

The IRS’s $20 billion tax battle with Coca-Cola centers on how companies handle cross-border transactions and could set Coke up as an example for other multinationals.

Overseas, Underreported

Companies like Coca-Cola make a large chunk of change licensing their intellectual property (like the recipe for Coke) to overseas units. They then charge low licensing fees abroad to lower their reportable income in the US, which charges a higher corporate tax rate than many other countries. The IRS said in 2015 that Coca-Cola had undercharged units in countries including Ireland, Brazil and Chile. 

This model isn’t limited to food and bev; the IRS has been cracking down in industries from pharma to tech:

• Short-term rental companies Airbnb and Newell Brands appealed the IRS’s attempts to collect more taxes in 2024. The IRS said the companies had underreported their US taxable incomes and owed $1.3 billion and $90 million, respectively. 
• The IRS said in 2023 that Microsoft owed nearly $29 billion in back taxes and interest penalties from income it earned in Puerto Rico, Ireland and Singapore. Microsoft said it’d appeal the decision. In pharma, Amgen could owe more than $10 billion.

Playing Kick the Can: The Big Four accounting firms (minus Coke’s auditor EY) submitted briefs supporting Coca-Cola, which seems confident of a win. But some analysts aren’t so sure. The IRS won the first and most recent round of the fight in 2020, when Coke had to pay $6 billion in taxes and interest, which it’s hoping to get back. While this week’s arguments will shake up the case, the ruling could take months — and if Coke loses, it could kick the case to the Supreme Court.