By Richard Rubin
Coca-Cola is waging a high-stakes corporate battle with more than $20 billion at stake, and the opponent isn't Pepsi or even Dr Pepper. It's the Internal Revenue Service.
The dispute between the beverage company and the taxman heads to a federal appeals court in Miami this week. The legal issues are complex, but the core question is simple: Does Coca-Cola report too much profit abroad and too little in the U.S.?
A Coca-Cola win would remove a potential liability that has been hanging over the company for a decade and give comfort to multinationals facing similar audits. That is particularly important in the technology and pharmaceutical industries, where companies can shift intellectual property across borders and concentrate earnings abroad so shareholders gain and the U.S. Treasury loses.
If Coke loses, however, it faces a bill for back taxes and interest that's larger than the company's net income from 2025 -- plus a higher tax rate going forward.
The IRS prevailed in the first round in the U.S. Tax Court in 2020, marking a rare triumph over large corporations and their teams of big-firm lawyers. Another win would embolden the government to pursue more companies' international maneuvers.
"This is a key case because it was the one 100% victory that the IRS won, " said Reuven Avi-Yonah, a University of Michigan law professor. A government loss, he said, would be a significant blow to the IRS effort against multinationals.
The case is a doozy that's dragged on through three Coke CEOs and 12 IRS top leaders, through Republican and Democratic administrations. In 2026, the two sides are still arguing over tax returns from 2007 through 2009, and key questions in the case revolve around a 1996 Coke-IRS agreement over the company's internal cross-border transactions.
"The IRS is probably sticking with this because the facts on the ground point so obviously toward tax avoidance," said Matt Gardner, senior fellow at the progressive Institute on Taxation and Economic Policy. "If you're not going to police this sort of tax avoidance, when are you going to do it?"
In securities filings, Coke projects extreme confidence and says it strongly disagrees with the IRS. Chief Financial Officer John Murphy told analysts in April that Coke would "judiciously manage" its balance sheet in advance of a ruling.
Three judges on the 11th U.S. Circuit Court of Appeals will hear the case June 25, with former U.S. Solicitor General Gregory Garre arguing for Coca-Cola. A ruling could take months, and the judges could kick some technical issues back to Tax Court. The losing side could ask the full court or the Supreme Court to weigh in.
A Coca-Cola spokesman declined to comment. The IRS, which generally doesn't discuss pending litigation, didn't provide comment.
Big stakes
The potential $20 billion price tag has been mounting for years. The company paid $6 billion in taxes and interest after the 2020 Tax Court loss. If Coca-Cola wins, it gets that back, plus interest.
A complete loss, however, wouldn't just affect 2007 through 2009. Because the company still uses the disputed cross-border method for calculating its taxes, Coke would likely owe more for 2010 through 2025. That's $14 billion in taxes and interest, plus a 3.8 percentage-point jump in Coke's effective tax rate this year. The company says that would cost $450 million for the first quarter alone.
The $14 billion potential payment exceeds the company's cash on hand as of April 3, so it may borrow to pay the tab.
Analysts following the company haven't been particularly alarmed by the risk. On Coke's most recent earnings call, the discussion focused on cherry-flavored drinks, World Cup marketing and growth in the Asia Pacific region.
"Is the company likely to cut brand spending? No. Or innovation? No. So capex for the company, I think, is fine, it's safe, and the dividend looks safe," regardless of the outcome, said Carlos Laboy, an analyst at HSBC.
Because of its confidence in victory, the company has recorded accounting costs for just $520 million of the $20 billion. Anticipating a win, it has even booked interest income that would accompany a refund.
Alex Martin of KBKG, a tax specialty firm, noted a recent shift in how the company discusses the case. Now, he said, executives emphasize that they will have enough cash and liquidity to pay a potential tax bill and protect the dividend, which has increased for 64 consecutive years.
"I don't think the analysts understand the issue," said Martin, who said the odds of a Coke loss are larger than many think.
Other corporate executives are watching the case closely. The IRS frequently challenges cross-border transactions, and it's currently litigating multibillion-dollar cases against Meta Platforms and Amgen. Three of the Big Four accounting firms -- all but EY, Coca-Cola's auditor -- weighed in with a brief favoring the company. So did the U.S. Chamber of Commerce and the National Foreign Trade Council.
Fight over foreign profits
The core issue is where Coca-Cola earns income.
For a company making physical products, that calculation might seem like it hinges on a straightforward analysis of the location of sales or production. But corporate taxes depend on where profit is earned, which is tied to where companies' most valuable assets are.
Coca-Cola is, in many ways, more of an intellectual property company than a high-value manufacturer. Its trademarks, brands and recipes can move or get licensed across borders within the corporation.
Prices for those internal transactions affect foreign subsidiaries' profit margins and are supposed to mirror terms that unrelated companies would accept. But there often aren't real-world examples of licensing agreements for corporate crown jewels; companies and the IRS frequently fight over details and assumptions.
Companies have an incentive to concentrate profits in low-tax foreign countries. That advantage persisted even after the U.S. lowered its corporate tax rate to 21% from 35% in 2017 and imposed minimum taxes on foreign income. It's still true now -- as evidenced by the potential jump in Coke's 2026 tax rate from a loss.
Coca-Cola's method for internal transactions dates back to that 1996 IRS agreement, which covered tax years going back to 1987. Under the "10-50-50" split, international supply points in places such as Brazil, Costa Rica, Ireland and Mexico are very profitable.
Supply points, which manufacture the concentrate used to make drinks, get 10% of gross sales, plus 50% of remaining profits.
Tax Court Judge Albert Lauber determined that Coca-Cola's internal deals were tilted improperly so these overseas operations received profits that should have stayed with the parent company.
"Why are the supply points, engaged as they are in routine contract manufacturing, the most profitable food and beverage companies in the world?" Lauber wrote.
The government emphasizes that the 1996 agreement didn't apply to subsequent years. And, the IRS contends, it didn't give the company general tax immunity if it used the 10-50-50 method, only offering protection from penalties.
"The combination of two non-promises does not add up to a promise, as Coca-Cola wishes," the government wrote in a court filing.
In Coca-Cola's view, however, the IRS made an unfair bait and switch. And, it argues, foreign subsidiaries earn real profits by doing significant work to learn and expand local markets.
"Far from seeking to evade its tax obligations, Coca-Cola carefully structured its operations to adhere to a method that the IRS had repeatedly blessed," the company wrote in a court filing.
Write to Richard Rubin at richard.rubin@wsj.com
(END) Dow Jones Newswires
June 21, 2026 05:30 ET (09:30 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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