John Whelan: Coca-Cola tax dispute with US authorities implicates Ireland again

The three accountancy firms made the claims last month in a court filing supporting Coca-Cola’s attempt to overturn the ruling — estimated to cost $18bn of back taxes — with implications for its future earnings.

What’s different this time is that the IRS has fine-tuned its allegations to Coca-Cola subsidiaries in countries that do not have a double tax treaty agreement with the US.

Ireland among countries in IRS sights

Coca-Cola operations in Ireland, Brazil, Chile, Costa Rica, Egypt, Mexico, and Swaziland are a particular focus.

The Irish and Egyptian supply points were adjudicated as being branches of Atlantic Industries, a group entity incorporated in the Cayman Islands, which does not have a double tax agreement with the US.

The manufacturing supply points in Costa Rica and Swaziland were also Atlantic Industries subsidiaries and deemed not protected by double tax agreements. The Brazilian and Chilean supply points had no recourse, because the US, during the tax years at issue, had no bilateral treaty with either Chile or Brazil.

The Mexican supply operation was entitled to treaty benefits under the Mexico-US treaty, but some six supply manufacturing plants relevant to the appeal had no treaty protections.

1,000 Irish staff make Coca-Cola concentrate 

Coca-Cola concentrate is produced at two Irish plants — Ballina, Co Mayo, and Drogheda, Co Louth — that employ 1,000 staff in the Republic. If these operations and their holding companies were fully registered in Ireland, they would enjoy the full benefit of the Ireland-US double taxation agreement.

The soft-drink maker has been hiding “astronomical levels” of profit by registering its holding companies in tax havens, such as the Cayman Islands, to shield it from the IRS, according to a withering US court judgement.

The dispute centres on what is known as ‘transfer pricing’ arrangements relating to the allocation of profits between Coca-Cola and its subsidiaries in different countries.

Transfer pricing in the spotlight

The ‘transfer pricing’ formula enabled the US parent that centrally manages Coca-Cola’s global marketing and product development strategies, and which owns almost all the group’s core intangibles, to receive considerably less income than the entities that produced syrup in accordance with the parent’s instructions.

Most of the accountancy and legal houses that advise multinationals will be watching the outcome of this case. A win for the IRS will create havoc across ‘transfer pricing’ schemes.

PepsiCo's experience in Australia 

The writing has been on the wall for some time on the old business models that rely on ‘transfer pricing’ as a core part of operations. 

In 2023, the other global soft-drinks corporation, PepsiCo, was adjudged by the Australian tax authorities to have undervalued royalty payments, to which royalty withholding tax would otherwise apply.

The judgement included PepsiCo and CMCI (Concentrate Manufacturing Company of Ireland) as the “brand owners”. 

The latter have facilities in Cork, which produce the concentrate that is shipped to various bottling companies around the world.

And, whereas, in a legal challenge to the Australian tax authorities, PepsiCo won their case, the Australian government is determined that their tax-evasion ruling will stand up in future cases, with a planned penalty from July 1, 2026 “to [large group] taxpayers …that are found to have mischaracterised or undervalued royalty payments, to which royalty withholding tax would otherwise apply’’.

The pressure is rising on multinational corporations to step up and implement the OECD base erosion and profit-shifting business model to ensure a global minimum tax at 15%.