8-KOther Events

COCA COLA CO 8-K Report, Corporate Update (Sep 18, 2015)

Filed September 18, 2015For Securities:KO

Summary

The Coca-Cola Company (KO) announced on September 17, 2015, that it received a Statutory Notice of Deficiency from the IRS for tax years 2007-2009. The IRS is claiming an increase in U.S. taxable income that could result in a potential additional federal income tax liability of approximately $3.3 billion, plus interest, though no penalties were asserted. This dispute largely centers on transfer pricing related to the licensing of intangible property to foreign related entities for overseas markets. The Company maintains that its transfer pricing methodology has been consistent with a 1996 closing agreement with the IRS, which was reportedly confirmed by the IRS in five subsequent audit cycles. Coca-Cola firmly believes the assessments are without merit and intends to challenge the Notice in the U.S. Tax Court. While the company has adequate tax reserves and believes the final outcome will not materially impact its financial position, it acknowledges the uncertainty inherent in tax disputes and that a loss could materially impact its financials.

Key Highlights

  • 1IRS Notice of Deficiency received for tax years 2007-2009.
  • 2Potential additional federal income tax liability of approximately $3.3 billion, plus interest.
  • 3Dispute concerns transfer pricing related to licensing of intangible property to foreign entities.
  • 4Company's transfer pricing methodology is based on a 1996 IRS closing agreement.
  • 5IRS has recommended the matter for litigation with the Chief Counsel.
  • 6Coca-Cola intends to contest the IRS claims in U.S. Tax Court and believes its position is strong.
  • 7Company states it has adequate tax reserves and believes the outcome will not be materially adverse, but acknowledges potential material impact if IRS prevails.

Frequently Asked Questions

The primary issue is a disagreement with the IRS over transfer pricing. Specifically, the IRS disputes the amount of taxable income Coca-Cola reports in the U.S. related to the licensing of its intangible property to certain foreign related entities for use in overseas markets.

The IRS is claiming an increase in U.S. taxable income that could result in a potential additional federal income tax liability of approximately $3.3 billion, plus interest. No penalties have been asserted.

Coca-Cola firmly believes the IRS assessments are without merit. The company plans to challenge the Notice in the U.S. Tax Court and is confident in its ability to prevail on the merits, citing its consistent use of a transfer pricing methodology agreed upon with the IRS in a 1996 closing agreement.

The company states that it regularly assesses the likelihood of adverse outcomes and believes it has adequate tax reserves. Coca-Cola's management believes the final outcome will not have a material impact on its consolidated financial position, results of operations, or cash flows. However, they also acknowledge that the ultimate outcome of such disputes is uncertain, and if the IRS were to prevail, it could have a material adverse impact.