U.S. Tax Court Enters Decision in Ongoing Dispute Between The Coca-Cola Company and the U.S. Internal Revenue Service

Rhea-AI Summary

The U.S. Tax Court has entered a decision in the ongoing tax dispute between The Coca-Cola Company (KO) and the U.S. Internal Revenue Service. The decision reflects a liability of approximately $2.7 billion, with the total amount anticipated to be around $6.0 billion including interest. Coca-Cola strongly disagrees with the IRS and Tax Court's interpretation and application of regulations and plans to appeal the decision within the next 90 days to the U.S. Court of Appeals for the Eleventh Circuit.

The dispute originated in 2015 when the IRS sought $3.3 billion in additional federal income tax for 2007-2009, reallocating over $9 billion of income from foreign affiliates to the U.S. parent company. Coca-Cola believes it will prevail on appeal regarding issues raised in both the 2020 and 2023 Tax Court opinions. The company has provided guidance on potential outcomes in its SEC filings, including the Form 10-Q filed on July 29, 2024.

Positive

• Coca-Cola maintains a strong belief in its position and plans to vigorously defend it on appeal
• The company has provided transparent guidance on potential outcomes in its SEC filings

Negative

• U.S. Tax Court decision reflects a liability of approximately $2.7 billion for Coca-Cola
• Total amount anticipated to be around $6.0 billion including interest
• Potential reallocation of over $9 billion of income from foreign affiliates to U.S. parent company
• Ongoing legal dispute may result in significant financial impact if appeal is unsuccessful

Legal Expert

The U.S. Tax Court's decision in the ongoing dispute between The Coca-Cola Company and the IRS marks a significant development with substantial financial implications. The court's ruling imposes a liability of approximately $2.7 billion, which, including interest, could reach $6.0 billion. This decision stems from the IRS's 2015 notice seeking $3.3 billion in additional federal income tax for 2007-2009, based on a retroactive reallocation of over $9 billion of income from foreign affiliates to the U.S. parent company.

From a legal perspective, Coca-Cola's stance that the IRS and Tax Court have "misinterpreted and misapplied the applicable regulations" sets the stage for a complex appellate process. The company's decision to appeal to the U.S. Court of Appeals for the Eleventh Circuit within the 90-day window is a strategic move to challenge the Tax Court's interpretation of tax laws, particularly those governing multinational corporations and transfer pricing.

The case highlights the ongoing tension between multinational corporations and tax authorities over profit allocation and transfer pricing methodologies. Coca-Cola's argument that the IRS rejected a previously agreed-upon methodology without prior notice raises questions about the stability and predictability of tax agreements between corporations and the IRS. This case could potentially set a precedent for how such disputes are handled in the future, affecting other multinational companies' tax strategies and their relationships with tax authorities.

Financial Analyst

The Tax Court's decision presents a significant financial challenge for Coca-Cola. The potential $6.0 billion liability, including interest, represents a substantial cash outflow that could impact the company's financial position and liquidity. However, it's important to contextualize this amount within Coca-Cola's overall financial strength.

As of their latest financial reports, Coca-Cola maintains a strong balance sheet with substantial cash reserves. The company's global operations and diverse revenue streams provide a buffer against such financial shocks. Nevertheless, investors should closely monitor how this potential liability might affect future dividend payments, share buybacks, or investment in growth initiatives.

From a market perspective, the uncertainty surrounding the appeal process could create short-term volatility in Coca-Cola's stock price. However, the company's proactive approach in providing guidance on potential outcomes demonstrates transparency, which may help mitigate negative market reactions.

Long-term investors should consider the broader implications of this case on Coca-Cola's global tax strategy. If the company loses the appeal, it may need to restructure its international operations and transfer pricing policies, potentially affecting its effective tax rate and global profitability in the future. Conversely, a successful appeal could reinforce the company's existing tax strategies and potentially benefit other multinationals facing similar scrutiny.

Coca-Cola to Move Forward with Appeal

ATLANTA--(BUSINESS WIRE)-- The U.S. Tax Court today completed the next step in the legal process by entering a decision in the ongoing tax case between The Coca-Cola Company and the U.S. Internal Revenue Service. The decision reflects a liability of approximately $2.7 billion. With applicable interest, the total amount is anticipated to be approximately $6.0 billion.

Coca-Cola strongly believes the IRS and the Tax Court misinterpreted and misapplied the applicable regulations involved in the case and will vigorously defend its position on appeal. The company has 90 days to file a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit. The company looks forward to the opportunity to begin the appellate process and, as part of that process, will pay the agreed-upon liability and interest to the IRS.

On Sept. 17, 2015, the company received a notice from the IRS seeking approximately $3.3 billion of additional federal income tax for years 2007 through 2009. In the notice, the IRS stated its intent to reallocate over $9 billion of income to the U.S. parent company from certain of its foreign affiliates retroactively, rejecting a previously agreed upon methodology without prior notice to the company.

On Oct. 15, 2015, the IRS designated this matter for litigation, precluding the company from any, and all, alternative means of resolution other than going to court. On November 18, 2020, the Tax Court issued an opinion in which it predominantly sided with the IRS. On Nov. 8, 2023, the Tax Court issued a second related opinion also siding with the IRS on the remaining issue.

The company believes it will prevail on appeal with respect to the issues raised in both the 2020 and 2023 Tax Court opinions. In line with the company’s goal to be as transparent as possible, the company has also provided guidance on the potential outcome should it not to be successful on appeal. This guidance and other details about the tax case are available in the Company’s Securities and Exchange Commission (“SEC”) filings, including the Form 10-Q filed on July 29, 2024.

The company continues to believe it will prevail in the case and will continue to vigorously defend its position.

FORWARD LOOKING STATEMENTS

This press release may contain statements, estimates or projections that constitute “forward-looking statements” as defined under U.S. federal securities laws. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which generally are not historical in nature. Forward-looking statements are subject to certain risks and uncertainties that could cause The Coca-Cola Company’s actual results to differ materially from its historical experience and our present expectations or projections. These risks include, but are not limited to, increases in income tax rates, changes in income tax laws or the unfavorable resolution of tax matters, including the outcome of our ongoing tax dispute or any related disputes with the IRS; the possibility that the assumptions used to calculate our estimated aggregate incremental tax and interest liability related to the potential unfavorable outcome of the ongoing tax dispute with the IRS could significantly change; increased or new indirect taxes; and other risks discussed in our filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2023, and our subsequently filed Quarterly Reports on Form 10-Q, which filings are available from the SEC. You should not place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to publicly update or revise any forward-looking statements.

About The Coca-Cola Company

The Coca-Cola Company (NYSE: KO) is a total beverage company with products sold in more than 200 countries and territories. Our company’s purpose is to refresh the world and make a difference. We sell multiple billion-dollar brands across several beverage categories worldwide. Our portfolio of sparkling soft drink brands includes Coca-Cola, Sprite and Fanta. Our water, sports, coffee and tea brands include Dasani, smartwater, vitaminwater, Topo Chico, BODYARMOR, Powerade, Costa, Georgia, Gold Peak and Ayataka. Our juice, value-added dairy and plant-based beverage brands include Minute Maid, Simply, innocent, Del Valle, fairlife and AdeS. We’re constantly transforming our portfolio, from reducing sugar in our drinks to bringing innovative new products to market. We seek to positively impact people’s lives, communities and the planet through water replenishment, packaging recycling, sustainable sourcing practices and carbon emissions reductions across our value chain. Together with our bottling partners, we employ more than 700,000 people, helping bring economic opportunity to local communities worldwide. Learn more at www.coca-colacompany.com and follow us on Instagram, Facebook and LinkedIn.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240802893315/en/

Investors and Analysts: Robin Halpern, koinvestorrelations@coca-cola.com

Media: Scott Leith, sleith@coca-cola.com

Source: The Coca-Cola Company

FAQ

What is the amount of tax liability decided by the U.S. Tax Court for Coca-Cola (KO)?

The U.S. Tax Court decision reflects a liability of approximately $2.7 billion for Coca-Cola (KO), with the total amount anticipated to be around $6.0 billion including interest.

When does Coca-Cola (KO) plan to file an appeal against the U.S. Tax Court decision?

Coca-Cola (KO) has 90 days from the Tax Court's decision to file a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit.

What was the original amount sought by the IRS from Coca-Cola (KO) in 2015?

In September 2015, the IRS sought approximately $3.3 billion of additional federal income tax from Coca-Cola (KO) for the years 2007 through 2009.

How much income did the IRS attempt to reallocate from Coca-Cola's (KO) foreign affiliates?

The IRS stated its intent to reallocate over $9 billion of income from certain foreign affiliates to Coca-Cola's (KO) U.S. parent company retroactively.