Coca-Cola Co. is set to argue before a three-judge panel of the 11th U.S. Circuit Court of Appeals in Miami on June 25 in a tax dispute with the Internal Revenue Service that could cost the beverage giant more than $20 billion. The case, which has dragged on through three Coca-Cola chief executives and 12 IRS leaders across Republican and Democratic administrations, centers on tax returns from 2007 through 2009.
The core question, according to the Wall Street Journal, is whether Coca-Cola reported too much profit abroad and too little in the United States through its internal cross-border transactions. The company uses a method known as the “10-50-50” split, dating back to a 1996 agreement with the IRS, under which international supply points in countries including Brazil, Costa Rica, Ireland and Mexico receive 10% of gross sales plus 50% of remaining profits.
The IRS prevailed in the first round in U.S. Tax Court in 2020. Judge Albert Lauber determined that Coca-Cola’s internal deals were tilted improperly so that overseas operations received profits that should have stayed with the parent company. “Why are the supply points, engaged as they are in routine contract manufacturing, the most profitable food and beverage companies in the world?” Lauber wrote in his ruling.
Reuven Avi-Yonah, a University of Michigan law professor, called the 2020 Tax Court decision “the one 100% victory that the IRS won” against large corporations. A government loss on appeal, he said, would be “a significant blow to the IRS effort against multinationals.”
Matt Gardner, senior fellow at the progressive Institute on Taxation and Economic Policy, said the IRS is “probably sticking with this because the facts on the ground point so obviously toward tax avoidance.” He added, “If you’re not going to police this sort of tax avoidance, when are you going to do it?”
Coca-Cola has already paid $6 billion in taxes and interest following the 2020 Tax Court loss. If the company wins the appeal, it would get that money back plus interest. A complete loss, however, would affect more than just the 2007-2009 tax years. Because the company still uses the disputed cross-border method, it would likely owe an additional $14 billion in taxes and interest for 2010 through 2025, plus a 3.8 percentage-point jump in its effective tax rate this year. The company said that would cost $450 million for the first quarter alone.
The $14 billion potential payment exceeds Coca-Cola’s cash on hand as of April 3, according to the company’s securities filings, meaning it may need to borrow to pay the tab. Despite the risk, analysts have not been particularly alarmed. Carlos Laboy, an analyst at HSBC, said capital spending and the dividend — which has increased for 64 consecutive years — look safe regardless of the outcome.
Alex Martin of KBKG, a tax specialty firm, said he believes the odds of a Coca-Cola loss are larger than many think. He noted a recent shift in how the company discusses the case, with executives now emphasizing that they will have enough cash and liquidity to pay a potential tax bill and protect the dividend. “I don’t think the analysts understand the issue,” Martin said.
In securities filings, Coca-Cola projects extreme confidence and says it strongly disagrees with the IRS. Chief Financial Officer John Murphy told analysts in April that the company would “judiciously manage” its balance sheet in advance of a ruling. Former U.S. Solicitor General Gregory Garre will argue for Coca-Cola before the appeals court.
The government argues that the 1996 agreement did not apply to subsequent years and did not give the company general tax immunity if it used the 10-50-50 method, only offering protection from penalties. “The combination of two non-promises does not add up to a promise, as Coca-Cola wishes,” the government wrote in a court filing.
Coca-Cola, in its own filing, said the IRS made an unfair bait and switch. The company argued that its foreign subsidiaries earn real profits by doing significant work to learn and expand local markets. “Far from seeking to evade its tax obligations, Coca-Cola carefully structured its operations to adhere to a method that the IRS had repeatedly blessed,” the company wrote.
A ruling from the appeals court could take months. The judges could also kick some technical issues back to the Tax Court. The losing side could ask the full 11th Circuit or the Supreme Court to weigh in.
The IRS is currently litigating multibillion-dollar cases against Meta Platforms and Amgen involving similar cross-border transaction issues. Three of the Big Four accounting firms — all but EY, Coca-Cola’s auditor — filed an amicus brief supporting the company, as did the U.S. Chamber of Commerce and the National Foreign Trade Council.