(Bloomberg) Coca-Cola Co. received notice from the Internal Revenue Service that it owes about $3.3 billion in extra taxes, plus interest, becoming the latest global company to clash with the agency over profits booked in foreign countries.
The IRS’s move follows an audit of the tax years 2007 through 2009, Coca-Cola said in a regulatory filing posted Friday. The IRS hasn’t demanded any penalties, and the beverage giant said it believes the assessment is without merit. The agency told Coca-Cola that the matter has been brought to the IRS’s top lawyer with the recommendation that it be litigated, according to the filing.
Coca-Cola is one of several large American corporations to get embroiled with the IRS over profits recorded in foreign countries, which critics say can unfairly shield money from U.S. taxes. The IRS also is fighting with Amazon.com Inc. and Microsoft Corp. on their intracompany transactions. Coca-Cola’s dispute centers on licensing of properties to foreign-based businesses, which manufacture, distribute and sell products.
“We plan to pursue all administrative and judicial remedies necessary to resolve this matter,” Coca-Cola said in a separate statement on Friday. “The company has followed the same methodology for determining our U.S. taxable income from certain foreign company operations for nearly 30 years.”
Under U.S. law, companies owe the IRS up to 35 percent on profits they earn around the world. They get credits for taxes paid to foreign governments, and they don’t have to pay the U.S. until they repatriate the money.
OVERSEAS REVENUE
That system gives companies an incentive to book income in low-tax countries and leave profits there. In 2014, Coca-Cola reported earning 57 percent of its net revenue outside the U.S., according to its most recent annual report. For tax purposes, however, the company reported earning 83 percent of its pretax income outside the U.S.
Coca-Cola cut its 2014 effective tax rate by 11.5 percentage points because so much of the company’s earnings were outside the U.S., and it gets tax incentives from Brazil, Costa Rica, Singapore and Swaziland.
As of the end of 2014, Coca-Cola had a total of $33.3 billion in profit held outside the U.S. on which it hasn’t paid U.S. taxes. As of earlier this year, that was more than all but 16 other companies.
Coca-Cola said it has followed the same process for determining its U.S. taxable income on “certain foreign company operations” for three decades and that the IRS had agreed to the methodology for tax returns from 1987 to 1995, and then again during five successive audits through 2006.
Coca-Cola, based in Atlanta, has requested a meeting with the IRS’s chief counsel and expects to file a petition in the U.S. Tax Court to challenge the notice. The company hasn’t taken a writedown over the matter and believes it has adequate tax reserves.
“The IRS now seeks to depart from this longstanding practice in order to increase substantially the amount of tax,” Coca-Cola said. “We are among hundreds of other companies currently facing these types of adjustments involving payments between related companies, and we will vigorously defend our position. We are confident we will prevail on the merits of this case.”