Coca-Cola Increases Estimate of IRS Betrayal to $13 Billion

Beverage giant says IRS bait-and-switch could cost it 103% of 2021 operating cash flow.

February 22, 2022

Coca-Cola’s (KO) tax fight with the IRS— it was on the hook for a potential $12 billion tax bill dating back years— has gotten significantly worse since we first broke the news last year.

Here’s some background:

“Nearly six years ago, the IRS notified Coca-Cola, a beverage company, it was seeking $3.3 billion in additional federal income tax for the years 2007-09 stemming from Coca-Cola’s transfer pricing with foreign affiliates. The notice came as a surprise, Coca-Cola says, because the company and IRS had previously agreed upon a transfer pricing methodology that would exempt the company from penalties going forward.

Though the IRS audited Coca-Cola five times to ensure the company was in compliance with the agreement for tax years 1996-2006, Coca-Cola says the IRS went back on its word, retroactively applied a new methodology without warning that shifted $9 billion in income from foreign affiliates to the U.S. parent, and triggered the additional $3.3 billion tax bill. Five years later in tax court, a judge sided predominantly with the IRS.”

In its latest 10-K, Coca Cola provided an update on the matter and reduced the related reserve from $438 million to $400 million. Though Coca-Cola believes it will ultimately prevail on appeal, the company did quantify the potential back taxes it might owe should the IRS win. Remember, the matter outlined thus far applies only for the tax years 2007-2009. If the IRS, according to Coca-Cola, were to apply its tax calculation methodology to subsequent years up to 2021:

“The Company estimates that the potential aggregate incremental tax and interest liability could be approximately $13 billion as of December 31, 2021. “

It’s the equivalent of 103% of Coca-Cola’s 2021 operating cash flow.

Coca-Cola isn’t the only company in hot water with the IRS over transfer pricing methodologies. The IRS dropped a not so subtle hint in 2020 that increased transfer pricing scrutiny was on the horizon. In April 2020, the IRS issued guidance outlining best practices and common mistakes in preparing transfer pricing documentation.

Related: PEP, FIZZ, MNST, KDP, EW

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