The Coca-Cola Company on June 2 asked the US Tax Court to reconsider and set aside its November 2020 transfer pricing decision, in which it determined that Coca-Cola’s US income should be increased by about USD 9 billion, according to a motion filed with the court and seen by MNE Tax.
The case related to intercompany royalties due to Coca-Cola from its foreign affiliates for the use of the company’s US-owned intangible assets during 2007–2009. In the case, Coca-Cola had argued that its royalty rates were determined in accordance with a still applicable 1996 closing agreement that it had with the IRS, but the court found the agreement to be inapplicable to the years at issue.
In its motion for reconsideration, Coca-Cola argued that the court failed to take into account the uniqueness of its case, which it said involved a closing agreement granting “forward-looking protection indefinitely (absent a material change in the facts of relevant tax law).” Coca-Cola added that it had followed the terms of the closing agreement, and the IRS had respected it, for more than a decade.
However, Coca-Cola said, the IRS then switched its position, without any notice or change in the facts or law. This action, so the company’s argument goes, was arbitrary, capricious, and unconstitutional. Thus, Coca-Cola contended that the IRS and the court got it wrong when they failed to consider the closing agreement as applicable, and that such failure violated its “reasonable reliance interests.”
Based on the closing agreement, Coca-Cola had applied a “10-50-50” transfer pricing method during the years at issue. However, the court accepted the IRS’s rejection of that method and its imposition of the comparable profits method, based on Coca-Cola being the owner of the intangibles.
Coca-Cola argued, however, that the comparable profits method was the wrong method and that its application conflicted with the underlying regulations. Coca-Cola contended that the court erred in concluding that the company’s supply points owned no intangibles and were not entitled to compensation for their contribution to the value of Coca-Cola’s brands under the regulations.
Your summary properly notes that this Appeals petition made only two arguments. One is the odd contention that closing agreements are forward looking. The other goes to the key issue of which entity owned the marketing IP, which was extensively discussed on the trial court decision.