3M Case Marks Pathway for Coca-Cola’s Transfer Pricing Victory
Coca-Cola Sees Opportunity in 3M Transfer Pricing Win
Coca-Cola is fighting an IRS transfer pricing adjustment that could total up to $18 billion in taxes and interest. The dispute focuses on how royalties paid by foreign affiliates for Coca-Cola’s IP should be allocated under IRC Section 482.
A recent appellate decision in 3M challenges how broadly the IRS can apply Section 482, raising questions about the agency’s authority to reallocate foreign income.
Present Result
3M Ruling Opens the Door—But with Limits
- The Eighth Circuit held that Section 482 does not automatically grant the IRS authority to reallocate income from foreign affiliates.
- Coca-Cola argues this supports throwing out IRS adjustments that exceed limits under Brazilian law.
- However, experts note material differences:
- 3M dealt with the “blocked income rule” and regulatory interpretation.
- Coca-Cola involves economic functions, risks, intangibles, and a historic 10-50-50 profit split from a prior IRS settlement.
- The Eleventh Circuit is not bound by the 3M precedent and may interpret Section 482 differently, especially post-Loper Bright, which overturned Chevron deference.
Next Steps / Expectations
- Eleventh Circuit Review: The court will now consider Section 482 without deferring to Treasury regulations—Coca-Cola’s core argument.
- Potential Reassessment: The court may question how much authority Section 482 gives the IRS, similar to 3M, but the distinct facts could lead to a different outcome.
- High Stakes:
- ~$6B relates to 2007–09
- Another ~$12B depends on whether the IRS method applies to 2010–24
- Broader Implications: The case could influence other multinationals with large TP disputes (Meta, Airbnb, Eaton).
- Key Strategic Debate: Some economists believe Coca-Cola should have focused on arm’s-length royalty rates, which might have aligned more directly with the 3M reasoning.
