Owes $3.

3 Billion in Taxes Over

Foreign Transfer Licensing

Team 7: Bharat Yellumahanti, Hiro Hasegawa, Jim Curatella, Yi Yang, Davis Zhou, Sneha Anguluri Lakshmi
 - THE COMPANY

2007-2016: World’s leading owner and marketer of non-alcoholic beverage brands.

World’s largest manufacturer, distributor and marketer of concentrates and syrups.
Coca Cola also sells “concentrates”.
Several concentrate plants around the world.

They own/license and market more than 500 non-alcoholic beverage brands.
Their products available to consumers in more than 200 countries— the world’s largest beverage distribution system.

The operating groups: • Eurasia and Africa • Europe • Latin America • North America • Pacific • Bottling Investments • Corporate

Revenue 2015: $44.29 billion

Revenue during 2007-2009 when IRS reported the Income-tax Liability

Revenue for 2007: $28.86 billion Revenue for 2008: $31.94 billion Revenue for 2009: $30.99 billion
 FOREIGN TRANSFER PRICING

The U.S. Overseas

Expenses (COGS)
Tax High Low
Net Income

Net income
Should pay $3.3 billion taxes!!
Your income in the U.S. should have been higher. You
set the license price lower.

No!!
We set fair license price, based on the
agreement. We followed the law.
 Battle
 Want to get tax in a fair way  Want to increase income
 Develop business infrastructure  Develop products & service
 Make the society better  Make the society better
 The U.S. Overseas
License use

License fee Right of using license

In the case license fee gets lower…

Lower tax rate overseas
The U.S. Overseas
Revenues Decrease -
Expenses (COGS) - Decrease
EBIT Decrease Increase Net income would be
Tax Decrease Increase higher
Net Income Decrease Increase
 Balance Sheet
1. Coca Cola has saved on income tax in a legal and smart way, which results in accumulation of
Retained Earnings
2. If Coca Cola loses this case, the company would have tax liabilities

Assets Liabilities + Owner’s Equity

Cash Liabilities
Account receivable Account payable
Inventories Note payable
tax liabilities
Equipment
facilities Owner’s Equity
Common Stocks
Retained Earnings
Total Total
Accounting Treatment

3 Scenarios

1. Court- Not liable

2. Court – Liable

3. Settles out of court

 Accounting Treatment

SCENARIO 2
SCENARIO 1 SCENARIO 3
Found liable
Not liable Settle out of court
Affects the balance sheet
No effect on balance sheet Affects the balance sheet
Affects the income statement if tax
No effect on the income statement No effect on the income statement
reserves are insufficient
Assets Liability Owner’s Equity

Taxes Payable Retained Earning

(Tax expense)
Assets Liability Owner’s Equity

Cash Taxes Payable Retained Earning

Tax Reserves
 Effect on Investors

(1) Assets = Liabilities + Stockholders’ Equity

(2) Assets = Liabilities + Paid-in Capital + Retained Earnings

(3) Assets = Liabilities + Paid-in Capital + Cumulative - Cumulative

Revenues Expenses
Stockholder’s Equity Increases: So What?

• Increase in Net Income

N.I. • Revenues – Expenses = N.I.

• Increase in Retained Earnings

R.E. • Cumulative Revenues – Cumulative Expenses = R.E.

• Increase in Stockholder’s Equity

S.E. • Paid-in Capital + Retained Earnings = S.E.

Dividends
Strength & Invest &
Stock Price
Investors
Potential Maintain
HAPPY!
 Foreign Transfer Pricing - LEGAL

Potential Investors

Low transparency

Domestic Tax Authorities

Clashing Opinions Foreign Tax Authorities
Taxpayers

Interpretation of facts

Complex Issue
 Compliance
 Tax
 CONCLUSION

 Coca-Cola has signed the 1996 Agreement with the IRS

 Protects the company from penalty

 Used same transfer pricing methodology for past 3 decades

Methodology is legal
bears NO negative consequence for the investors!