Coca-Cola facing 12 billion dollars in liabilities in tax battle with IRS

The Coca-Cola Co. is facing a potential liability of $12 billion in its long-running tax battle with the IRS, the company said Wednesday.

The Atlanta-based soft drink giant disclosed the potential tax hit as it reported fourth quarter and full-year 2020 results.

Coca-Cola and the Internal Revenue Service have been fighting since 2015, when the IRS, after a five-year audit of Coca-Cola, surprised the company with a “notice of deficiency” saying the company owes an additional $3.3 billion in taxes for 2007, 2008 and 2009.

The dispute centers on “transfer pricing,” where Coca-Cola licenses intangible property — such as the use of Coca-Cola’s brand and trade name and formulas -—to its foreign licensees so they can make, distribute, sell, market and promote Coca-Cola products.

In November, the company was hit with an adverse ruling by the U.S. Tax Court, in which the court predominantly sided with the IRS. In early January, Coca-Cola hired a former U.S. federal judge and general counsel for The Boeing Co. to serve as its counselor and special advisor in the tax battle.

Coca-Cola said Wednesday that it has set aside a tax reserve of $438 million for 2020 because of the dispute.

"The company believes that the IRS and the Tax Court misinterpreted and misapplied the applicable regulations in reallocating income earned by the company's foreign licensees to increase the company's U.S. tax. Moreover, the company believes that the retroactive imposition of such tax liability using a calculation methodology different from that previously agreed-upon by the IRS and the company, and audited by the IRS for over a decade, is unconstitutional. The company intends to assert its claims on appeal and vigorously defend its position."

Coca-Cola added that, "While the company strongly disagrees with the IRS' positions and the portions of the opinion affirming such positions, it is possible that some portion or all of the adjustment proposed by the IRS and sustained by the Tax Court could ultimately be upheld. In that event, the company would likely be subject to significant additional liabilities for the years at issue, and potentially also for subsequent periods, which could have a material adverse impact on the company's financial position, results of operations, and cash flows."