Tax liability can be decreased by writing off certain expenses. Like many households, corporations commonly deduct applicable expenditures on their annual tax returns.
The IRS allows multiple allowances depending on each taxpayer’s circumstances. However, are some tax advantages too extreme for the government?
Trade agreements: accounting can be unfair
When organizations trade labor or supplies, they often establish a transfer price for transactions. “Arm’s length” regulations require similar price points among all related entity agreements. Yet, some corporations allegedly manipulate transfer prices to their advantage.
Investors, regulators and auditors can access financial documents to ensure fair pricing and tax burden fulfillment. While international transactions may include additional fees, they may also provide a chance to report profits differently between regions for tax reduction purposes.
Can you use intangible property to minimize tax liability?
After over 100 years in operation, Coca-Cola cannot transfer intellectual property rights elsewhere. Yet, international subsidiary plants in countries like Mexico, Ireland, Chile, Egypt and Brazil produce products per corporate specifications.
These “supply points” then sell their concentrations to bottlers who aren’t generally owned by Coke. The bottling companies, in turn, provide retailers with more than 1.5 billion servings of Coke’s branded beverages each day.
In 1996, Coke settled terms with the IRS, in which the supply points receive 10% of gross profits, with the remainder to be split equally between Coke and the independent bottlers.
After a $9.5 billion income adjustment, operations continued accordingly for 11 years. However, this agreement didn’t establish indefinite terms. And Coke’s compliance disputes didn’t end there.
Coca-Cola and the IRS may remain at odds
In a comparable profits determination, contracted supply points showed a far greater return on assets than the bottlers. Their profits also exceeded those of The Coca-Cola Company, whose intangible property rights hold the essence of the corporation’s earning ability.
A court determined the supply points have no ownership of the soda company’s IP. In November, the United States Tax Court ruled on a transfer pricing adjustment of nearly $10 billion, which left Coke responsible for roughly $2.5 billion in additional taxes.
Coke could appeal the decision and work toward a more favorable resolution. Pending further litigation, however, businesses may find a lesson in the limitations of legal loopholes.