The Coca-Cola Co. v. Commissioner Case

Topic: Business Controversies
Words: 1122 Pages: 4


One of the critical legal issues of 2020 for business was the Coca-Cola Co. v. Commissioner case, which resulted in the loss of the Coca-Cola company. It was a multi-year and multi-billion dollar tax dispute of the company with the Internal Revenue Service (IRS) of the United States. As a result, the US Tax Court delivered a judgment in favor of the IRS in a dispute between the revenue service and the Coca-Cola company. The case concerned the inclusion of part of the company’s profits earned abroad from 2007 to 2009 in the tax base in the United States.

This dispute is interesting from the perspective of approaches to assessing the fair amount of royalties applied by the fiscal authority. In addition, this case is characterized by a critical perception by the US court of the taxpayer’s arguments regarding alternative transfer pricing methods developed as defense arguments. At the same time, this dispute is no less appealing from a legal point of view, namely, disagreements in interpreting previous agreements between the taxpayer and the US IRS.

Case Overview

The court decided for the IRS in the Coca-Cola Co. v. Commissioner case. The subject of judicial review was the relationship between the parent company, registered in the United States, and the subsidiaries of Coca-Cola and related legal entities (The Coca-Cola Co. v. Commissioner, 2020). The American company Coca-Cola carries out a wide range of strategic functions and owns all the intellectual property. In overseas markets, business is conducted through many interdependent manufacturing and marketing companies and independent beverage bottling companies (Avi-Yonah & Mazzoni, 2020). Hence, The world’s largest producer of soft drinks, Coca-Cola Company, faced a $ 3.3 billion fine for underreporting its profit in 2007-2009 (Bagchi, 2020). When discussing the peculiarities of transfer pricing, the court also considered the meaning of Coca-Cola’s intellectual property rights, particularly classified formulas, registered trademarks and the status of the most recognizable brand in the world.

Overall, one of the most significant transfer pricing lawsuits assessed the relationship between the American parent company Coca-Cola and its foreign affiliates. On November 18, a tax court upheld the IRS’s decision to include more than $ 9 billion of the Coca-Cola Group’s 2007-2009 foreign revenues from the company’s tax base in the United States (The Coca-Cola Co. v. Commissioner, 2020). The US court upheld the importance of consistency in the form and content of IPR transactions. Given the unified theoretical foundations of transfer pricing rules worldwide, the decision could have widespread implications in the United States and globally.

Positions in Action

The IRS has reviewed the level of remuneration in licensing agreements between the parent of the Coca-Cola Group and several foreign-related manufacturing companies. In the course of the audit, the IRS revealed that the taxable income of the company for a certain period should have been higher than what it reported (Avi-Yonah & Mazzoni, 2020). Based on the inspection results, the company was recommended to adjust the tax base for about USD 10 billion (Avi-Yonah & Mazzoni, 2020). The most important in the dispute was the question of whether the economic content of the transaction has absolute priority over the form.

Coca-Cola used the comparable profits method in calculating the tax base. As a result, the IRS concluded that 6 out of 7 foreign legal entities affiliated with Coca-Cola in 2007-2009 received more operating profit when considered in relation to operating assets (ROA). For instance, “the Irish, Brazilian, Chilean, and Costa Rican supply points’ average ROAs are 215%, 182%, 149%, and 143%, respectively” (The Coca-Cola Co. v. Commissioner, 2020). They had “ROAs higher than any of the 996 companies in the comparison group” (The Coca-Cola Co. v. Commissioner, 2020). In this regard, the regulator sent a notice to Coca-Cola that it could face a fine in the form of additional federal income taxes.

Coca-Cola’s position on this legal case is that the disputed amounts mainly relate to the issue of transfer pricing, taking into account the corresponding amount of taxable income. This amount should be reported by companies in the United States in connection with the licensing of intangible assets in certain foreign-related companies (The Coca-Cola Co. v. Commissioner, 2020). The company also claims to have followed the same transfer pricing methodology that it signed with the IRS in a 1996 tax levy agreement (Avi-Yonah & Mazzoni, 2020). Thus, this agreement should have protected the company from such fines.

Business Guidance

The case can be interpreted as guidance for the business in terms of tax policy. Initially, according to the company, this dispute would not significantly impact the financial results (Avi-Yonah & Mazzoni, 2020). Coca-Cola also noted that it regularly evaluates its tax reserves for such situations (The Coca-Cola Co. v. Commissioner, 2020). However, the company does not agree with either the IRS decision or the court decision; therefore, it is quite possible to appeal (Bagchi, 2020). Thus, even a large international company with full-time and freelance tax consultants has fallen into the trap of overly optimistic interpretation of agreements with the state. Consequently, for a business, the tax position, taking into account the positive reading of the conclusions in tax consultations, may turn out to be unprofitable.

Course of Action

As a result, at the end of the trial, the following measures can be taken into action. In the subsequent analysis of the market price level, it is necessary to study the terms of the contracts, regardless of the principle of content over form. According to the latest court practice and clarifications from the tax authorities, a detailed functional analysis should be carried out. Agreements with tax authorities cannot justify market price levels in future periods in the absence of specific agreements in this field. Therefore, it is essential to formulate the terms of the contract and formalize the agreements signed with the tax authorities in a binding form, for example, within the framework of a pricing agreement. The amount of the license fee must be consistent with the functional profile of the parties. In addition, it is necessary to take an inventory of intra-group agreements and the relevance of their terms.


The Coca-Cola Co. v. Commissioner case resolution is one example of the severe consequences for taxpayers of insufficient attention to transfer pricing and intra-group contracts. The legal issue revealed the question of the agreements between businesses and authorities, particularly in transfer pricing. The IRS claims that the company charged low-interest rates from overseas subsidiaries for the right to use the brand name from 2007 to 2009, resulting in lower US parent company revenues and unpaid income taxes of $ 3.3 billion. In general, these days, not only Coca-Cola but also other multinational corporations are concerned about the tax risks associated with transfer pricing issues.


Avi-Yonah, R. S., & Mazzoni, G. (2020). Coca Cola: A decisive IRS transfer pricing victory, at last. Tax Notes Federal, 169(11), 1739-1745.

Bagchi, A. (2020). Coca-Cola Must Pay Bulk of $3.4 Billion Tax Bill, Court Says (4). Bloomberg Tax. Web.

The Coca-Cola Co. v. Commissioner, 155 T.C. No. 10 (2020). Web.

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