Coca-Cola Entitled to Foreign Tax Credits in Transfer Pricing Dispute

U.S. Tax Court

The Tax Court, granting the Coca-Cola Co. partial summary judgment in a transfer pricing dispute with the IRS, held that the company was entitled to claim foreign tax credits for taxes paid to Mexico by a Mexican licensee, finding that the taxes were compulsory levies and creditable under <a href="/research/federal/usc26/901" resolve="/lr/resolve/901/cpnl" title="901">section 901</a>. The IRS made adjustments under <a href="/research/federal/usc26/482" resolve="/lr/resolve/482/cq9y" title="482">section 482</a> to Coca-Cola’s returns for the 2007-2009 tax years. According to the IRS, Coca-Cola’s Mexican licensee, a branch of a Coca-Cola subsidiary and member of Coca-Cola’s affiliated group, paid royalties to Coca-Cola that were not calculated at arm’s length. As a result, the IRS determined that the Mexican licensee claimed insufficient deductions for royalties and overpaid taxes to Mexico. The IRS further determined that the overpayments were not compulsory and were not taxes under section 901, making Coca-Cola ineligible to claim foreign tax credits for the overpayments on its federal tax return. Judge Albert G. Lauber, writing for the Tax Court, explained that section 901 regulations provide that a foreign tax is creditable when it is a “compulsory payment pursuant to the authority of a foreign country to levy taxes.” The court further explained that under the regulations an amount exceeding the foreign tax liability is not considered a compulsory payment. The Tax Court considered whether Coca-Cola satisfied the two requirements in <a href="/research/federal/cfr26/1.901-2#cwhk-0000072" resolve="/lr/resolve/1901-2e5i/cwhk#cwhk-0000072" title="1.901-2(e)(5)(i)">reg. section 1.901-2(e)(5)(i)</a> for a foreign tax to be considered compulsory. Lauber found that Coca-Cola relied on the advice of a competent and experienced tax lawyer in calculating the deductions for royalty payments. The court noted that the tax lawyer assisted in securing resolutions from the Mexican tax authorities that the arm’s-length method for determining the royalty payments was appropriate and advised regarding the continued use of that method. Lauber also noted that the method used had been approved by the IRS in a closing agreement years earlier and had been accepted by the IRS through 2006. The Tax Court concluded that Coca-Cola established that it had determined its Mexican tax liability for the years at issue in a manner consistent with a reasonable interpretation and application of the provisions of foreign law, the first requirement for a compulsory payment. The court also held that Coca-Cola satisfied the second requirement that the taxpayer “exhausts all effective and practical remedies, including invocation of competent authority procedures available under applicable tax treaties, to reduce, over time, the taxpayer’s liability for foreign tax.” Lauber found that a refund claim for any tax overpayment in Mexico would be premature prior to the adjudication of the transfer pricing adjustments. The court explained that the only other remedy would be to invoke competent authority procedures, which Coca-Cola attempted to invoke. The IRS refused to participate. The Tax Court concluded that Coca-Cola had exhausted its remedies, which made the taxes paid by the Mexican licensee compulsory under section 901 and creditable.

Related to <a href="/lr/resolve//1wbs1" target="_blank">Coca-Cola Co. v. Commissioner</a>, No. 31183-15 (T.C. 2017).

The Tax Court, granting the Coca-Cola Co. partial summary judgment in a transfer pricing dispute with the IRS, held that the company was entitled to claim foreign tax credits for taxes paid to Mexico by a Mexican licensee, finding that the taxes were compulsory levies and creditable under section 901.

The Tax Court, granting the Coca-Cola Co. partial summary judgment in a transfer pricing dispute with the IRS, held that the company was entitled to claim foreign tax credits for taxes paid to Mexico by a Mexican licensee, finding that the taxes were compulsory levies and creditable under section 901. The IRS made adjustments under section 482 to Coca-Cola’s returns for the 2007-2009 tax years. According to the IRS, Coca-Cola’s Mexican licensee, a branch of a Coca-Cola subsidiary and member of Coca-Cola’s affiliated group, paid royalties to Coca-Cola that were not calculated at arm’s length. As a result, the IRS determined that the Mexican licensee claimed insufficient deductions for royalties and overpaid taxes to Mexico. The IRS further determined that the overpayments were not compulsory and were not taxes under section 901, making Coca-Cola ineligible to claim foreign tax credits for the overpayments on its federal tax return. Judge Albert G. Lauber, writing for the Tax Court, explained that section 901 regulations provide that a foreign tax is creditable when it is a “compulsory payment pursuant to the authority of a foreign country to levy taxes.” The court further explained that under the regulations an amount exceeding the foreign tax liability is not considered a compulsory payment. The Tax Court considered whether Coca-Cola satisfied the two requirements in reg. section 1.901-2(e)(5)(i) for a foreign tax to be considered compulsory. Lauber found that Coca-Cola relied on the advice of a competent and experienced tax lawyer in calculating the deductions for royalty payments. The court noted that the tax lawyer assisted in securing resolutions from the Mexican tax authorities that the arm’s-length method for determining the royalty payments was appropriate and advised regarding the continued use of that method. Lauber also noted that the method used had been approved by the IRS in a closing agreement years earlier and had been accepted by the IRS through 2006. The Tax Court concluded that Coca-Cola established that it had determined its Mexican tax liability for the years at issue in a manner consistent with a reasonable interpretation and application of the provisions of foreign law, the first requirement for a compulsory payment. The court also held that Coca-Cola satisfied the second requirement that the taxpayer “exhausts all effective and practical remedies, including invocation of competent authority procedures available under applicable tax treaties, to reduce, over time, the taxpayer’s liability for foreign tax.” Lauber found that a refund claim for any tax overpayment in Mexico would be premature prior to the adjudication of the transfer pricing adjustments. The court explained that the only other remedy would be to invoke competent authority procedures, which Coca-Cola attempted to invoke. The IRS refused to participate. The Tax Court concluded that Coca-Cola had exhausted its remedies, which made the taxes paid by the Mexican licensee compulsory under section 901 and creditable.

United States - Mexico: Coca-Cola Co. et al. v. Commissioner

Sec. 482 Allocation of income and deductions among taxpayers

Sec. 901 Taxes of foreign countries and of possessions of United States

Sec. 905 Applicable rules

United States

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Coca-Cola Entitled to Foreign Tax Credits in Transfer Pricing Dispute