Clark Armitage Comments on Coca-Cola Co. v. Commissioner in Tax Notes

The U.S. Tax Court’s $2.7 billion tax deficiency determination in Coca-Cola’s transfer pricing dispute over its Brazilian royalties allocation could tally with interest of up to $6 billion for 2007 to 2009, the company said.

Judge Albert G. Lauber's August 2 decision in Coca-Cola Co. v. Commissioner, which pegs Coca-Cola Co.'s combined tax liability at $2.73 billion for those years, does not include interest. It “will be assessed as provided by law on the deficiencies due from petitioner,” the parties’ stipulation attached to the decision says. According to a company release from the same day, Coca-Cola anticipates that the final bill, including interest, could be approximately $6 billion.

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Coca-Cola said it “strongly disagrees” with the opinions of the IRS and the Tax Court. After performing the required evaluation process prescribed by Accounting Standards Codification Topic 740, Accounting for Income Taxes, the company stated that it has concluded “it is more likely than not [that] the Company’s tax positions will ultimately be sustained on appeal is unchanged as of June 28, 2024.” Coca-Cola therefore just slightly updated its tax reserve to $456 million, a small fraction of the potential amount at stake.

“Coca-Cola’s small reserve in their financial statement shows they’re convinced that they can win this,” J. Clark Armitage of Caplin & Drysdale’s Washington office told Tax Notes August 2. “I think in their appeal to the Eleventh Circuit, they need to not only focus on constitutional issues, but also on the bare-bones transfer pricing questions.”

Armitage said the best transfer pricing argument is to look at the "foreign field" as "a whole: the ‘supply points’ and the ‘servcos’ combined earned arm’s-length profits, and therefore, the pricing between the U.S. parent and the Supply Points was arm’s length.”

“Whether or not the supply points paid arm’s-length transfer prices to the servcos does not support a conclusion that the pricing between the U.S. parent and the Supply Points was not arm’s length,” Armitage added. “The Tax Court’s decision in effect tried to fix mispricing at one point in the value chain by inappropriately adjusting prices at another point in the value chain.”

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