The Future of Transfer Pricing: Lessons from Coca-Cola's Ongoing Tax Dispute with the IRS

Benchmarking intangible property poses inherent challenges for businesses of all sizes, including giants like Coca-Cola. The soft drink titan recently made headlines with its appeal against the IRS’s conclusion that its royalty payments constituted non-compliant profit shifting. Coca‑Cola is no stranger to tax disputes; its famous formula and the consumption of over 2 billion servings per day have long made it a prime target for tax authorities.

Previously, the IRS focused on Coca-Cola’s transfer pricing practices. An investigation was initiated, which was thought to have concluded in 1996 under a closing agreement. According to that agreement, the company’s supply points retained 10 percent of gross sales as profit, while the remaining profit was split equally between the U.S. parent company and its foreign supply points. This method became known as the “10-50-50 method.” For 11 years, audits did not contest this approach. However, in 2007, the IRS changed its strategy and adopted the Comparable Profits Method (CPM), using data from Coca-Cola’s independent bottlers as benchmarks. This adjustment resulted in transfer pricing modifications totaling $9 billion, effectively reallocating profits from foreign supply points to the U.S. parent company.

In its appeal, Coca‑Cola challenged the IRS’s methodology, arguing that the longstanding acceptance of the 10‑50‑50 method for over a decade should be taken into consideration. Conversely, the IRS maintained that the profit allocation did not accurately reflect the economic realities, such as the tasks handled and risks assumed by the U.S. parent and foreign subsidiaries. Notably, the U.S. parent manages global marketing, research and development, executive management decisions, strategy, and capital allocation and owns almost all of the group’s intangible assets. The IRS’s shift from a previously accepted methodology has garnered criticism from major public accounting firms, which warn that this could lead to broader repercussions for other taxpayers. Nonetheless, the IRS appears determined to stand by its case.

In 2020, the Tax Court confirmed the IRS’s position, prompting Coca‑Cola to deposit over $6 billion in 2024 to cover the deficiencies and accrued interest. The company estimates that if the IRS’s new transfer pricing approach is applied to subsequent tax years and upheld, it could face an additional $12 billion in liabilities—bringing its total potential exposure to approximately $18 billion.

Companies that have relied on the previous transfer pricing methods are now closely monitoring this case. Tax authorities will continue scrutinizing transfer pricing regardless of a taxpayer’s size. It is reasonable to expect that the IRS will remain at the forefront of such issues for the foreseeable future. This case is a prime example of the necessity to review and, if necessary, update transfer pricing processes, methods, and benchmarking annually, as previously utilized methods may not be accepted going forward.

Please contact our Global Business Services team with questions regarding transfer pricing regulations or any other international tax issue.