Extended Background

Coca-Cola’s core profit engine has always relied on both secret formulas and global brand marketing—split across US and foreign affiliates. For decades, the IRS accepted a safe-harbor profit split that assigned a steady share to the US parent and bottling affiliates, based on legacy practices, not current benchmarks.

Before the BEPS push, longtime agreements and APAs (Advance Pricing Agreements) were typically respected if adhered to. But shifting business models and new benchmarking raised questions about whether such formulas still reflected economic reality.

Detailed Arguments

Taxpayer

• Relied on a historic APA-approved split (the so-called "10-50-50"), arguing that long-term reliance and stability protected them.

• Presented combined profit splits and longstanding CUP data.

Tax Authority (IRS)

• Highlighted changes in market conditions and affiliate functions after the APA's inception.

• Used benchmarking to propose higher US allocations, arguing that legacy deals must be revisited as substance changes.

Court Reasoning

• Concluded that APAs and legacy safe harbors cannot freeze arrangements forever if facts fundamentally shift.

• Supported the IRS's right to apply new methods when warranted—invoking economic substance.

Procedural Journey

• IRS terminated the safe harbor; Tax Court imposed $3.3B+ in extra US tax after extensive litigation.

• Affirmed that legacy deals are not immune to review.

Implications Beyond the Case

• Underscored the need for regular benchmarking updates—even in APA-governed MNEs.

• Warned all MNEs that rapid market or business changes will trigger review and possible method switches.

• Modern compliance: Maintain current, robust comparables and be prepared to explain the ongoing validity of any long-standing TP arrangement.

Original Case Link:

US Tax Court -- Coca-Cola (PDF)