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In Tax Notes International’s weekly news analysis, Susan Fickling-Munge, a managing director in Duff & Phelps’ transfer pricing practice, was quoted in an article discussing Coca-Cola’s transfer pricing dispute with the Internal Revenue Service (IRS) that claims the company undercharged several of its foreign licensees to use Coke’s intellectual property abroad, including beverage formulas and trademarks.
The IRS says the foreign licensees should have paid Coca-Cola an additional $9.4 billion in royalties between 2007 and 2009, meaning that Coke should have paid an extra $3.3 billion in federal taxes. Coca-Cola contends that the $9 billion figure exceeds the total operating profits that the licensees at question earned during the three years. Beyond that, the company says the IRS is being arbitrary and capricious by suddenly challenging the transfer pricing method that Coke has relied on for the past two decades — a method that Coke and the IRS agreed on in a 1996 closing agreement.
The agreement has since expired, but the parties had an understanding that Coke would not incur penalties if it continued to rely on the method after the closing agreement formally ended. Both sides hashed out their arguments before the U.S. Tax Court and practitioners are hoping the impending decision will answer whether Coke’s reliance on the closing agreement was reasonable.
Coca-Cola’s approach to the closing agreement is not abnormal, according to Fickling-Munge. “Historically, taxpayers have thought that, ‘Well, we had an agreement, we should continue to use that approach,’” says Fickling-Munge. “When we’re talking to our clients in the context of a transfer pricing analysis, or when we’re thinking about IP valuation, certainly some of the questions we ask are about the audit history and what prior agreements with the IRS have been.”