On May 8, 1886, a Civil War veteran and pharmacist named John Pemberton was experimenting with a nonalcoholic alternative to the morphine he had become addicted to after a saber wound at the Battle of Columbus. He accidentally mixed the base syrup with carbonated water and then decided to sell it as a fountain drink rather than a medicine. Pemberton’s bookkeeper, Frank Robinson, came up with the name and the flowing script trademark. Today, the Coca-Cola company sells over 1.9 billion servings of its drinks every day in every country except Cuba and North Korea, and “Coca-Cola” is the second-most recognized phrase in the English language.
Pemberton’s recipe is still a closely guarded secret. Only two of the company’s 79,000 employees know the exact formula, and they’re not allowed to travel together. When one dies, the other designates a successor and passes along the secret. Even the identity of those two employees is secret. And the only written copy sits in a vault on the grounds of the World of Coca-Cola museum in Atlanta.
But there’s one secret the alchemists at Coca-Cola are still working on today, and that’s the secret to paying less tax on all that fizzy carbonated goodness. Last week, the Tax Court told the company to keep working and hit them with a bill for $6 billion in back taxes and interest.
Companies like Coca-Cola that operate globally can structure operations to report income in all sorts of places. Naturally, they’ll want to report as much as possible in countries with low taxes. Why pay the old 35% corporate tax on profits here in the U.S. if they can pay, say, 12.5% in Ireland?
That incentive leads to classic tax dodges like the “double Irish Dutch sandwich,” which sounds like a penalty you’d see on an Olympic rugby pitch. In reality, it involves: 1) establishing an Irish holding company to own intellectual property rights to a tasty carbonated beverage, 2) registering the holding company in a tax haven like the Bahamas, 3) licensing the IP to a Dutch holding company, 4) selling the sweet deliciousness to customers in high-tax countries, 5) routing the profits back to a different Irish company, then 6) passing them on to the Bahamas where they’re effectively tax-free. (Before you ask: no, it won’t work for you.)
Incredibly, that whole shell game is legal if you don’t get too greedy. (Remember the old Wall Street adage: bulls make money, bears make money, pigs get slaughtered.) There’s an entire body of law called “transfer pricing,” where specialized lawyers who can’t handle the fast-paced excitement of regular tax work plot out the rules for pricing transactions within and between businesses under common ownership or control. (You can read the [not so] easy to understand IRS explanation of “transfer pricing” HERE.)
These sorts of technical disputes can take a long time to resolve. In this particular case, the IRS sent a notice back in 2015 stating their intent to reallocate over $9 billion of Coca-Cola’s income to the U.S. parent company from 2007, 2008, and 2009. The company has announced they’ll pay the $6 billion, at least for now, and appeal the Tax Court’s decision.
You might not think $6 billion is a lot of money for a company the size of Coca-Cola, but it represents almost seven weeks of global sales. That’s a pause that does not refresh. So you can be sure the chemists working in the tax department will keep tweaking their formulas to keep every drop possible, even if their formula winds up in a courtroom instead of a museum. And even if the numbers are smaller, we can work the same magic for you!