Coca-Cola and the IRS fight in Florida over a $20bn transfer-pricing tax bill

Coca-Cola is headed to court in Florida this week, with the US IRS seeking to turn a long-running transfer-pricing fight into a roughly $20bn tax bill. Oral arguments are set to begin Thursday, and the dispute is one of the clearest modern stress tests of how much US-based multinationals owe when profits are earned through foreign subsidiaries.

The core of the case is straightforward, even if the math is not: the IRS says Coca-Cola underreported profits from transactions among its foreign affiliates. Coca-Cola is appealing a 2020 US Tax Court ruling that upheld the IRS’s finding that the soft drink giant undercharged units in several countries, and the stakes are large enough that the outcome is closely watched across corporate America.

Here is what the IRS and the court are really debating. Transfer pricing is the method companies use to set prices for transactions between parts of the same corporate group, often across borders. When the US tax rate is higher than many other jurisdictions, companies have an incentive to structure intercompany licensing and similar arrangements so that more profit appears where taxation is lower. The IRS’s argument in Coca-Cola’s case is that the company did exactly that, using pricing for its overseas units that the IRS believed shifted too much income away from the US.

The IRS notified Coca-Cola in 2015 that it owed billions in back taxes after concluding the company undercharged its units in Ireland, Brazil, Chile, Mexico, Costa Rica, Egypt and Eswatini (formerly known as Swaziland). This was not a random audit that sprang up from nowhere. The origins date back to a 1996 settlement, when the two sides agreed on a formula for how much profit foreign affiliates could retain. Under that settlement, foreign affiliates were allowed to keep profit equal to 10 percent of their gross sales, with the remaining income split evenly between the US headquarters and the overseas unit.

Coca-Cola’s position is that this 1996 formula should still apply. The company argues it should be able to use the agreed pricing approach when determining its tax liabilities, essentially asking the court to treat the earlier settlement as continuing guidance for the newer audit periods. The IRS disagrees and contends that the settlement terms should have no bearing on Coca-Cola’s tax liabilities arising from audits in 2007, 2008 and 2009. In other words, the IRS is not just saying “you paid too little.” It is saying “the rules you rely on do not govern the period at issue.”

If that sounds technical, it is, but the consequences are political in the fiscal sense. The case matters because it can influence how much US multinationals must pay on income generated abroad, especially where profits are routed through licensing and affiliate transactions. Reuven Avi-Yonah, an expert in taxation law at the University of Michigan Law School, described the potential exposure as about $20bn, calling it significant. That figure is not just a number for the courtroom; it is a benchmark for how far the IRS may go in revisiting profit shifting strategies and in expanding enforcement.

Coca-Cola has not just fought on principle. It agreed to pay the IRS $6bn in back taxes and interest in 2024 while preparing its appeal. But the company could still face up to $14bn more if the US Court of Appeals for the Eleventh Circuit sides with the government. Coca-Cola says it is confident in the appeal and argues that the IRS “misinterpreted and misapplied the applicable regulations.” For decision-makers, this is the kind of posture that signals both litigation grit and balance-sheet planning: pay now to manage risk, then contest the interpretation that could enlarge the bill later.

Why are so many corporate tax teams watching? One reason is that the IRS has historically struggled in litigating transfer pricing complaints. The story notes that the IRS has lost a string of cases against major corporations through the decades, including Bausch & Lomb, US Steel Corp and Hospital Corp of America. Avi-Yonah framed the Coca-Cola case as potentially important because, if upheld on appeal, it could represent the first clear IRS victory of this type in many decades involving profit shifting out of the US. That matters because outcomes change behavior: if enforcement efforts look winnable, companies may settle rather than litigate, and that can reshape how tax departments budget for disputes.

Second, this fight arrives during an IRS push under the Biden administration to ramp up tax collection efforts against companies benefiting from transfer pricing arrangements. The broader enforcement environment includes high-profile cases such as Microsoft, which the IRS announced in 2023 owed $28.9bn in back taxes, plus penalties and interest, tied to income derived from distribution of software through subsidiaries in Puerto Rico, Ireland and Singapore. Microsoft disagreed with the IRS’s reasoning and planned to appeal. In 2024, the IRS announced underpayments of $1.33bn by Airbnb and $90m by Newell Brands, with both challenging determinations in the US Tax Court.

Put it together, and Coca-Cola’s case becomes more than a beverage giant versus the taxman. It is a referendum on whether the IRS can successfully build a repeatable playbook for auditing and challenging intercompany pricing in a way that US courts will uphold. Alex Martin, an expert in transfer pricing at KBKG, said the IRS designated this case for litigation because it could provide a template to audit other US companies with highly profitable subsidiaries.

If that “template” language holds up in court, boards and CFOs at other multinationals will feel it immediately. The question for them is not simply “Will we win or lose on one fact pattern?” It is whether a rule, a formula, or a regulatory interpretation becomes something that future audits can point to. In a world where transfer pricing is one of the main levers shaping where profit is reported, the Coca-Cola outcome could determine how aggressively the IRS keeps pushing, and how costly it becomes for companies to treat earlier settlements as durable protection.