Soda war: Coca-Cola fights the IRS

Knicks vs. Spurs. Ali vs. Frazier. Coca-Cola vs….the IRS?

Yes, really. Beverage giant Coca-Cola is fighting with the taxman.

The company and the Internal Revenue Service will enter oral arguments before the US Court of Appeals for the Eleventh Circuit in Miami starting June 25 in a dispute regarding how Coke reports profits in the US vs. abroad. At stake? Nearly $20 billion for Coca-Cola.

The Coke dispute is primarily concerned with how much the company’s foreign affiliates paid to use Coke’s intangible property, like formulas, trademarks, and brand names; the IRS argues affiliates didn’t pay enough and the company was not taxed adequately in the US as a result. Coke, meanwhile, argues that it relied on a transfer pricing policy established in a previous IRS settlement from 1996.

A ruling could take some time—and the case has already been around for a minute. First filed by the IRS in 2015, it persisted throughout the tenures of three Coke CEOs and 12 IRS top leaders, per the Wall Street Journal.

The US Tax Court sided with the IRS in 2020, and Coca-Cola is appealing; the beverage giant already paid the IRS $6 billion following the 2020 loss, but that will be refunded should the company win the appeal. If Coke loses, it could owe up to $14 billion more, per Bloomberg Tax.

“We’re talking about truly massive dollars, almost unprecedented in the transfer pricing context,” Chad Martin, a principal at CPA and advisory firm Eide Bailly, told the outlet, calling the case “the Super Bowl of transfer pricing controversy.”

“This is a key case because it was the one 100% victory that the IRS won,” making an IRS loss a considerable blow to the agency’s fight against multinationals, Reuven Avi-Yonah, a University of Michigan law professor who specializes in corporate and international taxation, told the Wall Street Journal.

The IRS has fought other cross-border transactions, including a multi-billion dollar case against Meta involving its subsidiaries in Ireland.

“The IRS is probably sticking with [the Coke case] because the facts on the ground point so obviously toward tax avoidance,” Matt Gardner, senior fellow at the Institute on Taxation and Economic Policy, told the WSJ. “If you’re not going to police this sort of tax avoidance, when are you going to do it?”