Coca-Cola Caught for 'Tax Evasion' in Overseas Profit Transfer... 3.6 Trillion Won Tax Penalty

U.S. Federal Tax Court Rules in Favor of IRS
Setback Inevitable for Coca-Cola's Tax Strategy

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kwon Jae-hee] Coca-Cola in the United States was caught by authorities for disguising overseas business profits as higher than they actually were in order to evade high domestic taxes.

According to the Wall Street Journal (WSJ) on the 18th (local time), the U.S. Federal Tax Court upheld the Internal Revenue Service's (IRS) tax assessment of $3.3 billion (approximately 3.67 trillion KRW) for the fiscal years 2007 to 2009.

Judge Albert Robber stated, "Coca-Cola's overseas subsidiaries have little to no royalties or intellectual property rights and have no discretion over marketing," adding, "The strategy is determined by U.S. executives." He further explained, "Some of these subsidiaries earn much more than Coca-Cola's headquarters because the parent company managed the traffic flow."

Most of the U.S. foreign income was generated by Coca-Cola subsidiaries in Brazil, Ireland, and Egypt.

As a result of this ruling, Coca-Cola faces a massive tax payment. Since the $3.3 billion is not a finalized amount, the tax burden could increase further. WSJ reported, "If the government applies the same standards to subsequent tax years, the amount could grow even larger," and added, "This ruling has disrupted Coca-Cola's tax strategy."

Multinational corporations, including Coca-Cola, have been abusing transfer pricing manipulation to evade taxes by shifting profits such as intellectual property royalties. Transfer pricing manipulation involves allocating business expenses incurred in low-tax countries to entities in high-tax countries while concentrating profits in entities established in low-tax jurisdictions to reduce taxes.

It has been revealed that some multinational corporations manipulate transfer prices to maximize after-tax profits by exploiting differences in corporate tax rates between countries. Particularly, intellectual property rights and trademarks, which are increasingly significant as intangible assets, are being abused in this way despite regulatory difficulties.

Before the U.S. reduced its corporate tax rate in 2017, American companies deferred taxes owed to the U.S. by portraying profits earned in low-tax countries as higher to avoid the 35% U.S. corporate tax rate.

Coca-Cola has not issued an immediate response regarding this ruling. However, since it has previously stated to investors that it would fight against the IRS, it is highly likely to appeal.

This content was produced with the assistance of AI translation services.