January 13th, 2016
The IRS continues its aggressive approach to transfer pricing enforcement, with the Coca-Cola Company serving as the latest taxpayer to raise their contentions in the court house. Coca-Cola filed a petition with the United States Tax Court disputing the over $9 billion adjustments to three years of their taxes. The Service is asking for $3.3 billion in additional tax, resulting primarily from the prices charged between related entities for use of trademarks and formula rights.
The petition contains a variety of arguments, including that the IRS departed from previously executed closing agreements. From a technical transfer pricing perspective, the IRS made the largest adjustments to foreign licensee’s transactions. These related companies were located in Mexico, Brazil, Ireland, Egypt, Swaziland, Chile and Costa Rica. The focus of the argument is the use of the Comparable Profits Method (CPM) for similarly situated bottlers. Coca-Cola presents the case that the licensees performed many additional functions and assumed real risk apart from normal bottlers, so that the transfer pricing method used by IRS was not appropriate. Other arguments include the IRS’ failure to consider foreign legal restrictions for pricing requirements imposed out of Brazil.
Also of interest, the IRS made an adjustment to the Mexican licensee when the entity was a branch for U.S. tax purposes. Coca-Cola pays U.S. taxes on the Mexican income currently, subject to any foreign tax credits, and the adjustment would likely not result in Coca-Cola paying any additional world-wide tax. This highlights the approach taken more and more frequently by the IRS. Many times, international taxpayers tend to gloss over transfer pricing issues with disregarded or flow-through entities, but the IRS has shown it will still look for the proper arm’s length result that impacts taxpayer’s foreign tax credits.
This petition only presents Coca-Cola’s side of the argument, but should alert taxpayers with international operations of the continued enforcement of transfer pricing issues from all angles by the IRS.
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