An IRS audit of Coca-Cola Co. has determined that the company underpaid its taxes by billions of dollars in the 2007 through 2009 tax years. The company has been notified that it currently owes about $3.3 billion in extra taxes, plus interest.
The global beverage company is clashing with the agency over profits booked in foreign countries. Coca-Cola’s dispute centers on transfer pricing, or how it reports income from foreign licensing of manufacturing, distribution, sale, marketing and product promotion in overseas markets. Critics say that profits recorded in foreign countries can unfairly shield money from U.S. taxes.
Coca-Cola reported earning 57 percent of its net revenue outside the U.S. in 2014, cutting its effective tax rate by 11.5 percentage points. Coca-Cola had a total of $33.3 billion in profit held outside the U.S. as of the end of 2014. The company is based in Atlanta, Georgia.
The IRS hasn’t demanded any penalties, but the agency reportedly disclosed to Coca-Cola that the matter has been brought to the IRS’s top lawyer with the recommendation that it be litigated. Several other large American corporations are fighting the same fight. Amazon.com Inc. and Microsoft Corp. are reportedly being examined by the IRS over their intracompany transactions.
Companies must pay the IRS up to 35 percent on profits they earn around the world under U.S. law. However, companies are allowed to book credits for taxes paid to foreign governments, giving them an incentive to book income in low-tax countries and leave profits there.
In a regulatory filing posted Friday, Coca-Cola said it believes the assessment is without merit. Coca-Cola is expected to file a petition in the U.S. Tax Court to challenge the notice.
In the filing, Coca-Cola said it has followed the same process for determining its U.S. taxable income for three decades. It continued on to say that the IRS had agreed to the methodology for tax returns from 1987 to 1995 and for five successive audits through 2006.