IRS Calls on Coca-Cola to Pay Up

Coca-Cola might owe an additional $3.3 billion in federal income taxes following an audit, says the Internal Revenue Service (IRS).

Following a five year audit of the company, the IRS concluded that the company’s strategy of lowering its taxable income through transfer pricing, underestimates the amount the company should’ve been paying in taxes. Transfer pricing allows companies to move profits offshore to places with lower tax rates, avoiding otherwise higher U.S. taxes. Transfer pricing is not inherently abusive or illegal, but it can be manipulated to reduce a company’s tax burden beyond what is considered legal. Last year, Coca-Cola reportedly paid an effective tax rate of 23.6%, well below the 35% statutory tax rate.

Coca-Cola is one of the many multinational corporations that use transfer pricing to lower their U.S. tax bills.

Coca-Cola held approximately $33.3 billion offshore between 2008 and 2014 in locations including the Cayman Islands, Ireland, and Luxembourg—all well-known tax havens. In 2004, corporations were offered a “repatriation holiday”, which offered corporations a steep one-time discount on profits returned to the U.S., Coca-Cola moved almost $1 billion of profits  out of the Cayman Islands, where the company employed not a single employee, illustrating that the company’s business in the Cayman Islands was likely not functioning as such, but rather a scheme to exploit the tax code and avoid U.S. taxes.

Other well-known multinationals, including Facebook and Google, rely on some of the same tactics to reduce their tax bills by shifting profits offshore. Companies across industries are able to shift profits offshore, and some of the worst offenders are household names, as the below table shows.

The ability of multinational corporations to aggressively shift their profits into low-tax or tax free jurisdictions has raised eyebrows around the globe. For example, Facebook paid £4,327 ($6,643) in U.K. corporate taxes in 2014, outraging workers in the United Kingdom who on average paid £5,392.80 (or approximately $8,266) in income tax and national insurance contributions during that same year.

The IRS’s willingness to take on Coca-Cola is a step in the right direction.

More multinational corporations should be called to account for the massive sums of money they shift offshore. When corporations like Apple—which currently holds $181 billion offshore—utilize tax havens to avoid U.S. taxes, these accounting tricks have very real consequences for the federal budget.  Apple, for example, would owe more than $59 billion in taxes if it brought its profits back into the United States—money that could be used to make needed investments in education, nutrition, and our nation’s infrastructure.  

Apple is so adept at exploiting loopholes in the tax code, that in 2012 Apple was found to have created three offshore financial entities that on paper belonged to no country or place. Without a home, these three entities were outside the reach tax collectors around the world—the “holy grail of tax avoidance,” as Sen. Carl Levin (D-MI) described the tactic in a hearing. If Apple were to pay the U.S. taxes it owes on the profits it currently holds offshore, that revenue would be enough to pay for f needed repairs on more than 17 percent of deficient public school buildings across the country.

Ultimately, multinational corporations will continue to be able to hold enormous amounts of profits offshore, unless incentives to shift profits offshore are eliminated. Ending deferral, a loophole that allows corporations to avoid paying taxes on profits held offshore indefinitely, would eliminate many of the incentives for corporations to move profits overseas in the first place.

The IRS should be able to effectively enforce the law.

Short of closing substantial corporate tax loopholes, empowering the IRS to effectively enforce laws and regulations which are already on the books could go a long way in discouraging tax avoidance. Unfortunately, cuts to the IRS’s budget in recent years have jeopardized the IRS’s ability to work towards its mission. Since 2010, the IRS has lost more than 13,000 permanent, full-time employees, and the agency expects to lose more than 3,000 additional by the end of the year, according to IRS Commissioner John Koskinen. These cuts handicap the agency’s ability to audit and investigate all taxpayers fairly—including multinational corporations.

Increasing the IRS’s funding to a least to 2010 levels would go a long way in empowering the IRS to investigate similar tax schemes being used by other multinationals. Every additional dollar invested in IRS tax enforcement produces approximately $6 in increased revenue for the federal government, which can then be reinvested in providing public services and investments. An effective IRS would be able to conduct more audits, like this recent audit of Coca-Cola, to ensure corporations are following the law and paying their fair share towards federal investments.

For Further Reading:

Don’t Pave Our Potholes with Corporate Tax Cuts, The Fine Print, 10/14/2015

New Research Finds Excessive Stock Option Compensation Leads CEOs to Ignore Product Safety Problems, The Fine Print, 10/8/2015

Will Justice Prioritize Corporate Wrongdoers?, The Fine Print, 9/24/2015