(Newswire.net — November 20, 2015) — The Coca-Cola Company (NYSE:KO) allegedly owes upwards of $3 billion in unpaid back taxes to the U.S. from the years 2007 to 2009. The company has denied the legitimacy of the IRS’s claims, believing them to be “without merit.” But regardless of which side of the issue you’re on, this will be an interesting issue to watch unfold.
The Back Story
First introduced by pharmacist John Pemberton in the late 19th century, and then bought out by businessman Asa Candler, Coca-Cola has become synonymous with the city of Atlanta. With approximately 450,000 residents inside the city limits, and another 5.5 million in the metro area, it’s the perfect place for the Coca-Cola Company to call home.
And while Coca-Cola typically stays above the riff-raff by carefully conducting honest business agreements and making calculated decisions, it appears that they may be in some hot water this time.
Coca-Cola has been officially notified by the IRS that it owes $3.3 billion in federal taxes – plus interest. Company officials aren’t quite so sure, though. In a regulatory filing, they claim the IRS’s accusations are without merit and they’ll pursue “all administrative and judicial remedies necessary to resolve the matter.”
What’s Really Happening
The issue is apparently over what amount of income should be reported as taxable income in the United States. This is a tricky matter, as the Atlanta-based company has numerous licensing deals that permit foreign affiliates to sell products – including drink concentrates – to overseas bottlers.
As you may know, this is a fairly common tax issue for multinational companies. It’s common for organizations to charge foreign partners low licensing fees in order to shift income away from the U.S. (where tax rates are notoriously much higher). However, the interesting part about this case is that it’s so public. Most of the time, these types of cases are settled outside of court for fractional amounts.
“They hardly ever get to court, because neither party wants to experience the hazards of litigation,” says Robert Willens, president of a New York-based tax accounting consultancy.”
In that regulatory filing, Coca-Cola accused the IRS of changing protocol because of the amount of money that’s on the table. “The IRS now seeks to depart from this long-standing practice in order to increase substantially the amount of tax,” the report reads. “We are among hundreds of companies currently facing these types of adjustments involving payments.”
The Future Outlook
So, what’s the most likely outcome? Well, as mentioned, these cases typically get settled out of court. But is the IRS trying to make a statement? It’s possible, but not likely. These types of filings and transactions are normally winked at, so it’s interesting that the IRS has made Coca-Cola’s issue so public.
The other question is in regards to how this will impact the Coca-Cola Company. Like most companies, they have a reserve that’s designed for tax matters just like this. While company officials are reassuring investors that their fund is large enough to cover this dispute, they are forthcoming enough to recognize that the deficiency interest could have an adverse impact on the company’s overall financial position, should it be higher than expected.
Just last year, the company reported total sales of $45.91 billion, which put it at number four on the Forbe’s list of the World’s Most Valuable Brands – just behind Apple, Microsoft, and Google. When you look at those sales numbers, you realize that $3 billion isn’t quite as weighty as it initially sounds. The markets seem un-moved by the event. KO stock is trading in the $43 dollar range today, near its 52 week high of $45 per share. However, Coca-Cola’s share price is largely pinned by its generous dividend policy. If the IRS action gains traction, those dividends may be in jepordy in the future.
Moving forward, it will be interesting to see how this situation impacts future tax filings of multinational companies. Will things remain the same, or is the IRS tightening its grip as the national deficit continues to increase?