The IRS says Coke owes $3.3 billion

The Internal Revenue Service said on Friday that Coca-Cola owes them $US3.3 billion.

In a filing with the SEC on Friday, Coke disclosed that on Thursday it received a notice from the IRS seeking $US3.3 billion, plus interest, after the service completed a 5-year audit of its tax years running from 2007 to 2009.

In 2014, as a point of reference, Coke’s tax bill was $US2.2 billion and its net income totaled $US7.1 billion.

At issue is income received by the company in connection with licensing its products in foreign markets.

Basically, the IRS is asserting that Coke should recognise some of this income in the US, rather than overseas, and now wants Coke to pay up.

Coke disagrees, saying in the filing:

The Company has followed the same transfer pricing methodology for these licenses since the methodology was agreed with the IRS in a 1996 closing agreement that applied back to 1987. The closing agreement provides prospective penalty protection as long as the Company follows the prescribed methodology, and the Company has continued to abide by its terms for all subsequent years. The Company’s compliance with the closing agreement was audited and confirmed by the IRS in five successive audit cycles covering the subsequent 11 years through 2006, with the last audit concluding as recently as 2009.

And so basically Coke doesn’t think it did anything wrong. The filing also notes that the IRS has not asserted any penalties.

Coke added that the IRS didn’t notify the company it was planning to assert that it owed these taxes until two weeks before issuing the notice, and the IRS has also made a recommendation that this matter be designated for litigation. Coke has requested a meeting with the IRS’ chief counsel.

The company added that, it “firmly believes that the assessments are without merit and plans to pursue all administrative and judicial remedies necessary to resolve this matter,” adding that it plans to file a petition challenging the notice.

As for any financial impact, Coke said, “the ultimate outcome of disputes of this nature is uncertain, and if the IRS were to prevail on its assertions, the assessed tax and deficiency interest could have a material adverse impact on the company’s financial position, results of operations or cash flows.”

This is more or less boilerplate language, but the takeaway is that at this stage Coke doesn’t really know how or if this will hurt them going forward.

We’ve reached out to Coke for additional comment and will update if we hear back.

In afternoon trade on Friday, Coke shares were down 0.8%.

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