Coca-Cola is currently embroiled in a high-stakes legal battle with the Internal Revenue Service (IRS) over as much as $20 billion in alleged back taxes. The dispute centers on Coca-Cola's transfer pricing, specifically how the company valued transactions between its U.S. parent company and its foreign affiliates for the right to use intellectual property like its trademark and brand names. The IRS argues that the foreign affiliates did not pay enough, leading to underreported U.S. income and taxes for Coca-Cola.
The case is set to go before the U.S. Court of Appeals for the Eleventh Circuit in Miami for oral arguments on June 25. Coca-Cola is appealing two previous U.S. Tax Court rulings from 2020 and 2023 that largely sided with the IRS. According to Coca-Cola, it had been relying on a transfer pricing method established in a prior settlement, but the IRS later changed its preferred method, leading to the current dispute. The company has already paid $6 billion to the IRS, which would be refunded if Coca-Cola ultimately wins the appeal. However, if it loses, it could be liable for an additional $14 billion.
Adding another layer to the appeal, Coca-Cola is arguing that IRS regulations concerning "blocked income" are invalid. These regulations allow the IRS to allocate the full amount an affiliate would owe to the U.S. parent's income, even if certain countries, like Brazil, limit royalty payments from local affiliates. Coca-Cola contends that a recent 2024 Supreme Court ruling (Loper Bright), which weakened agencies' regulatory authority by eliminating "Chevron deference," should lead the Tax Court to re-evaluate its previous decisions on blocked income. Investors face potential risk, as Coca-Cola has only reserved $520 million for this potentially massive payment, despite the $6 billion already paid and the possibility of owing up to $14 billion more. This low reserve is permissible under accounting rules that allow companies to determine reserves based on whether they deem it "more likely than not" they will prevail or pay a specific amount.
