The stakes in Coca-Cola’s (KO) transfer pricing dispute with the IRS are becoming higher with every passing quarter. Every 90-days that the $13 billion issue goes unresolved, Coca-Cola estimates its potential liability increases by a quarter billion dollars.

Nearly seven years ago, the IRS notified Coca-Cola 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.

The tax liability in the matter now tops $13 billion.

In its latest 10-Q, Coca-Cola updated investors with regard to the interest and penalties it estimates it would owe should it fail to win its appeal:

“The Company estimates the impact of the continued application of the Tax Court Methodology for the three months ended April 1, 2022 would increase the potential aggregate incremental tax and interest liability by approximately $250 million.”

The company also revealed the $3.3 billion the IRS originally sought for the years 2007-09 is now estimated to be $5 billion including interest accrued through April 1st. This is the amount Coca-Cola would initially be required to pay within 90-days of the Tax Court rendering a final decision.

As DuDil previously noted, the IRS dropped a not so subtle hint two years ago 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.