Coca-Cola and IRS Clash in Court Over $20 Billion Tax Bill

Coca-Cola and the Internal Revenue Service (IRS) are set to face off in a Florida court this week, escalating a decades-long legal battle over the beverage giant’s tax liabilities on profits earned abroad. The Atlanta-based company will begin arguing before the court on Thursday, focusing on transfer pricing—the valuation of transactions between corporate affiliates—which could leave Coca-Cola facing an additional tax bill of up to $20 billion.

The case is being closely watched by the business community because its outcome will influence how much U.S.-based multinational corporations pay in taxes on income from their overseas subsidiaries.

Core of the Dispute

Coca-Cola is appealing a 2020 U.S. Tax Court ruling that upheld the IRS’s conclusion that the company underreported profits from transactions with its foreign subsidiaries. In 2015, the IRS notified Coca-Cola that it owed billions in back taxes after determining the company had undercharged its units in Ireland, Brazil, Chile, Mexico, Costa Rica, Egypt, and Eswatini (formerly Swaziland).

U.S. corporations often charge low royalty fees to foreign affiliates to minimize taxable income at home, where corporate tax rates are higher than in many other countries. “The IRS audited Coca-Cola because the company is generating massive profits in Ireland and other nations,” said Alex Martin, a transfer pricing specialist at tax consultancy KBKG.

The IRS first took Coca-Cola to court in 2015, but the dispute dates back to 1996, when the two sides reached a settlement on tax obligations for the 1987-1995 period. Under that deal’s pricing formula, Coca-Cola’s foreign subsidiaries kept 10% of net profits on total sales, with the remainder split evenly between the U.S. parent and the overseas unit.

Coca-Cola argues that this formula remained in effect after 1996, while the IRS contends it does not apply to audits for 2007, 2008, and 2009. “The potential exposure is $20 billion, which is huge,” said Reuven Avi-Yonah, a tax law expert at the University of Michigan Law School.

Coca-Cola agreed to pay $6 billion in back taxes and interest in 2024 while preparing its appeal, but could face an additional $14 billion if the 11th U.S. Circuit Court of Appeals rules in favor of the government. Coca-Cola maintains that the IRS “misinterpreted and misapplied the regulations” and expressed confidence it will win the appeal.

Broader Implications

The case is seen as significant because it could set a precedent for the U.S. government to increase tax collections from major multinational corporations. “The IRS sees this case as precedent-setting, which can be used to audit other U.S. companies with high-profit foreign subsidiaries,” Martin said.

Under former President Joe Biden, the IRS ramped up tax enforcement against businesses benefiting from transfer pricing arrangements. One notable recent case came in 2023, when the IRS said Microsoft owed $28.9 billion in back taxes, plus penalties and interest, on income from distributing software through affiliates in Puerto Rico, Ireland, and Singapore. Microsoft said it disagreed with the IRS’s claims and would appeal, and if unsuccessful, would go to court.

In 2024, the IRS said short-term rental platform Airbnb and consumer goods manufacturer Newell Brands had underpaid taxes by $1.33 billion and $90 million, respectively. Both have disputed the findings before the U.S. Tax Court.

The Coca-Cola case is particularly notable because the IRS has historically lost transfer pricing lawsuits, falling short against major corporations such as Bausch & Lomb, US Steel Corp, and Hospital Corp of America. “This case matters because it’s the first clear win for the IRS in decades on profit-shifting cases out of the U.S. If upheld on appeal, many companies may choose to negotiate rather than litigate,” Avi-Yonah said.