Monday, January 4, 2021
Reuven S. Avi-Yonah (Michigan) & Gianluca Mazzoni (S.J.D. (International Tax) 2020, Michigan), Coca-Cola: A Decisive IRS Transfer Pricing Victory, At Last, 169 Tax Notes Fed. 1739 (Dec. 14, 2020):
Coca-Cola [Coca-Cola Co. v. Commissioner, 155 T.C. No. 10 (Nov. 18, 2020)] is the first decisive IRS victory in a major transfer pricing case since 1979. If not reversed on appeal, the outcome will mark an important shift in U.S. transfer pricing litigation and perhaps indicate that the IRS could win other major pending cases, such as the one against Facebook.
In 1993 the IRS introduced advance pricing agreements as a way to manage transfer pricing disputes. APAs have now been adopted all over the world and are a good way to reduce transfer pricing litigation. The problem, however, is that APAs are still used only by a minority of U.S.-based multinationals because the litigation record has so favored taxpayers in large transfer pricing cases that entering into an APA felt like leaving money on the table.
If Coca-Cola is upheld on appeal, that situation could change. Perhaps more large U.S. multinationals would enter into transfer pricing APAs, as well as binding arbitration under treaties. It may also presage more IRS victories in cases like Facebook,11 especially because the IRS won in the Tax Court, where most large transfer pricing cases begin. The IRS can now apply its knowledge to litigate other cases.
As has been shown, judges tend to take the government’s revenue needs into account in deciding large tax cases.12 With the budget deficit exploding as a result of the COVID-19 pandemic and more urgent needs on the horizon, Coca-Cola may be a harbinger of more taxpayer defeats.