Paging Howard Buffett….
Coca-Cola said in a regulatory filing with the Securities and Exchange Commission today that it has received a notice from the IRS stating that it has about $3.3 billion in potential additional income tax liability. The beverage maker wasted no time in alerting investors, as management said they received the letter on Thursday.
Shares of Coca-Cola were little affected by the news. As of this writing, the stock was down 0.77 at $39.08 per share.
Coca-Cola may owe for 2007 – 2009
In an 8K filing, Coca-Cola said the IRS sent it a Statutory Notice of Deficiency for the tax years 2007 to 2009 after doing a five-year audit. The notice states that the IRS believes the beverage maker's taxable income should be increased by an amount that could require it to have to pay another $3.3 billion in taxes for those years, plus interest. The IRS did not assert that any penalties will be required. Coca-Cola management explained in the filing:
"The disputed amounts largely relate to a transfer pricing matter involving the appropriate amount of taxable income the Company should report in the United States in connection with its licensing of intangible property to certain related foreign licensees regarding the manufacturing, distribution, sale, marketing and promotion of products in overseas markets."
Coca-Cola doesn't think it owes anything
The company also said it is confident that it will seek to have the matter settled and that it is confident it won't have to pay the $3.3 billion the IRS thinks it owes. Coca-Cola said it has used the same methodology for transfer pricing since it agreed to that methodology in a closing agreement in 1996, which applied to tax years back to 1987.
The agreement offers the company protection if it follows the same methodology that was in the agreement, which management said they did. Coca-Cola said the IRS didn't provide any explanation for the potential adjustments until about two weeks before it issued the notice. The agency also notified the beverage maker that a recommendation to litigate the issue has been made to the Chief Counsel of the IRS.
Coca-Cola has requested a meeting with the agency's chief counsel. The company said it intends to "pursue all administrative and judicial remedies necessary to resolve this matter." It plans to petition the U.S. Tax Court to challenge the notice from the IRS and plans to "vigorously defend" itself against the IRS' claims.
Taxation on overseas cash a problem
The issue Coca-Cola is facing is relating to how it records its revenue and whether that revenue was earned in the U.S. or overseas. It's common for major U.S.-based companies to record most of their sales overseas in so-called "tax havens" which charge little to no taxes on corporations. Companies' use of tax loopholes to reduce their U.S. taxes has been up for heated debate in recent years, and the IRS has started to flex its muscles to say that companies can't dodge taxes this way any longer.
According to Bloomberg, Coca-Cola reported that it earned 57% of its net revenue overseas. However, for tax purposes, the beverage maker said it earned 83% of its pretax income overseas. That helped the company slash its effective tax rate for last year 11.5 percentage points. As of the end of last year, Coca-Cola reportedly had $33.3 billion in cash held overseas, which it had not paid U.S. taxes on. Bloomberg reports that this amount was higher than the amount of all but 16 other corporations.