Coca-Cola faces IRS in appeal over overseas profit tax bill

Coca-Cola and the Internal Revenue Service are returning to court this week in a long-running fight that could leave the company owing about $20bn in US taxes, according to Al Jazeera. The case is drawing attention because it may affect how much US multinationals pay on profits booked through foreign subsidiaries.

Oral arguments are due to begin Thursday in a Florida court, Al Jazeera reported. The dispute concerns transfer pricing, the method companies use to set internal charges between related corporate entities.

Dispute over foreign subsidiaries

Coca-Cola is appealing a 2020 US Tax Court decision that backed the IRS’s finding that the company understated profits tied to dealings among its overseas units, according to Al Jazeera. The IRS first told Coca-Cola in 2015 that it owed billions in additional taxes after reviewing its arrangements involving subsidiaries in Ireland, Brazil, Chile, Mexico, Costa Rica, Egypt and Eswatini.

Al Jazeera reported that US-based multinationals can reduce taxable income in the United States by charging lower licensing fees to foreign units, especially when those units operate in countries with lower corporate tax rates. Alex Martin, a transfer-pricing specialist at tax consulting firm KBKG, told Al Jazeera that the IRS audited Coca-Cola because the company was generating very large profits in Ireland and several other countries.

The government’s court fight with Coca-Cola began in 2015, but Al Jazeera reported that the roots of the conflict go back to a 1996 settlement covering tax liabilities from 1987 through 1995. Under that settlement’s formula, foreign affiliates could keep profits equal to 10 percent of gross sales, while the remaining income was divided equally between Coca-Cola’s US headquarters and the overseas unit.

Coca-Cola says that formula should still apply, according to Al Jazeera. The IRS argues that the earlier settlement should not control the company’s tax obligations for audits covering 2007, 2008 and 2009.

Potential bill and appeal

Reuven Avi-Yonah, a tax law expert at the University of Michigan Law School, told Al Jazeera that Coca-Cola’s potential exposure is about $20bn. Coca-Cola paid the IRS $6bn in back taxes and interest in 2024 while it prepared its appeal, according to Al Jazeera.

If the US Court of Appeals for the Eleventh Circuit rules for the government, Al Jazeera reported, Coca-Cola could owe as much as $14bn more. Coca-Cola says the IRS misread and misapplied the relevant regulations and has said it expects to prevail on appeal, according to Al Jazeera.

Broader stakes for corporate tax cases

Tax experts told Al Jazeera the case could give the IRS a model for pursuing more revenue from large companies with profitable overseas operations. Martin said the IRS designated the dispute for litigation because it could guide audits of other US companies with highly profitable subsidiaries.

Al Jazeera reported that the IRS stepped up transfer-pricing enforcement under former President Joe Biden. In 2023, the agency said Microsoft owed $28.9bn in back taxes, plus penalties and interest, tied to software distribution income through subsidiaries in Puerto Rico, Ireland and Singapore.

Microsoft rejected the IRS’s position and said it would appeal within the tax agency and go to court if needed, according to Al Jazeera. In 2024, the IRS also said Airbnb and Newell Brands had underpaid by $1.33bn and $90m, respectively; both companies challenged those findings in US Tax Court, Al Jazeera reported.

Avi-Yonah told Al Jazeera the Coca-Cola case is notable because the IRS has often lost major transfer-pricing cases, including disputes involving Bausch & Lomb, US Steel Corp and Hospital Corp of America. If the Tax Court ruling survives appeal, he said, more companies may choose settlements over litigation.

This story draws on original reporting from Al Jazeera.