As corporate-government tax pacts crumble, Coca-Cola challenges huge U.S. bill

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WASHINGTON (Reuters) – Coca-Cola Co KO.N thought it had made an agreement with the U.S. Internal Revenue Service on how much the company charged foreign affiliates for the rights to manufacture and sell coke products abroad.

Coca-Cola bottles are seen in a Carrefour hypermarket in Montreuil, near Paris, France, on February 5, 2018. REUTERS / Regis Duvignau

Then, in September 2015, a letter from the IRS arrived at Coca-Cola’s Atlanta headquarters with an overdue tax bill amounting to $ 3.3 billion stunned the world’s largest beverage maker. alcohol-free.

Coca-Cola sued the IRS, disputing the bill. The case is currently being tried in the US Tax Court in Washington. A verdict is not expected for some time after the end of the trial, expected in mid-April.

The case is being followed closely by tax experts as a sign of growing tension between tax authorities and multinational corporations over transfer pricing, i.e. the way companies value goods, services, the trademarks and patent rights that they constantly transfer between foreign units across the country. limits.

An important management discipline within multinationals, transfer pricing is more closely scrutinized than ever by tax agencies around the world due to new and stringent global standards, increasing legal risks for businesses and their investors.

The Coca-Cola case is on trial, as companies’ interest in seeking multi-year agreements with the IRS covering transfer pricing agreements has waned over the past two years.

The IRS said Friday it received 101 requests in 2017 for “advance pricing agreements” (APA), similar to the 98 level in 2016, but well below the peak of 183 in 2015.

Requests for ABS also fell in 2016 in Japan, the top US bilateral partner for ABS, according to the latest data.

Anecdotal evidence suggests that the ABS process, designed to prevent conflict, is strained in many countries, with some tax lawyers citing Mexico, Italy and China as difficult.

Corporate tax directors at a conference in Washington earlier this month said APAs take longer to negotiate and government tax agencies are less willing to do them.

“We are really living in a different time and we can understand why the tax authorities might be reluctant because there is a lot more external control than there has ever been,” said Amy Roberti, director of tax policy and global tax for Procter & Gamble Co. PG.N, at the conference.

Asked for more details later, Roberti said through a company spokesperson that APPs help Procter & Gamble build “relationships with governments and tax authorities.”

The IRS did not immediately respond to questions about the Coca-Cola case and transfer pricing in general.

Coca-Cola responded to questions by providing an internal memo to employees about the case that read, “The company firmly believes that the IRS claims are without merit and will pursue all available administrative and legal remedies.

TRANSFER PRICE CHALLENGE

The IRS argues that Coca-Cola charged several foreign affiliates too low royalties from 2007 to 2009, which reduced the parent company’s U.S. revenues and resulted in its U.S. income taxes being underpaid by 3, $ 3 billion.

Tax agencies often challenge transfer pricing agreements on the grounds that they are put in place to minimize income in high-tax countries and maximize it in low-tax countries.

As part of a base erosion and profit shifting framework put in place by the Organization for Economic Co-operation and Development (OECD) in 2016, around 100 national tax agencies, including the ‘IRS, expect companies to use an “arm’s length” approach to transfer pricing.

This means, in the case of trademark rights, for example, to charge foreign units royalties equal to their open market value. The problem is that trademarks are generally unique. It is therefore difficult to come close to their “arm’s length” price.

Coca-Cola has said in court records that the IRS approved the company’s method of setting its transfer pricing for affiliates in a 1996 agreement, but the IRS then withdrew that approval and issued the invoice for tax arrears.

Coca-Cola did not have an APA with the IRS. Instead, it had an APA-type “audit close agreement” that dated back to 1996 and which the company said was reaffirmed in subsequent audits.

But a lot has changed in transfer pricing in the past 20 years since Coca-Cola struck a deal with the IRS.

“It’s an interesting case,” said former acting IRS commissioner Steven Miller. “If I were a tax director, I would wonder how much I can count on deals like this.

“It just goes to show how important it is not to just assume that a deal can be invoked forever because apparently maybe not,” said Miller, now national tax director at consulting firm Alliantgroup.

Additional reporting by Chris Prentice in New York, Amanda Becker in Washington and Stanley White in Tokyo; Editing by Damon Darlin and Steve Orlofsky


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