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Between a Bottle and a Hard Place: Coca-Cola and Other High-Profile Cases Underscore Criticality of Modernizing Transfer Pricing Operations

Landmark cases testify to the scrutiny intercompany accounting practices are receiving from tax authorities worldwide. Transfer pricing has proven problematic leading to multi-billion-dollar settlements against multinationals. High-profile cases offer teachable moments to multinational finance, accounting, and tax teams.

FourQ Staff
FourQ Staff

Apr 14, 2021

Landmark cases testify to the scrutiny intercompany accounting practices are receiving from tax authorities worldwide. In particular, transfer pricing, or the price charged by one legal entity to another legal entity who are members of the same consolidated group, has proven problematic leading to multi-billion-dollar settlements against multinationals.

High-profile cases offer teachable moments to multinational finance, accounting, and tax teams.

The Coca-Cola Co.

The disagreement in Coca-Cola Co. v. Commissioner of Internal Revenue surrounded the appropriate transfer price to be paid to the U.S. parent group for valuable intellectual property associated with the manufacture, distribution, and sale of the company’s well-known global brands. The parent company licensed intellectual property (trademarks, product names, logos, patents, secret formulas, and proprietary manufacturing processes) to its foreign affiliates, which in turn, used the property to manufacture and sell concentrate to distributors and retailers throughout the world.

The IRS alleged deficiencies stemming from transfer pricing adjustments made under section 482 of the Internal Revenue Code (IRC). Upon examination of Coca-Cola’s 2007-2009 returns, the IRS determined that the company’s methodology did not reflect arm's-length norms thereby overcompensating the supply points and undercompensating the U.S. parent company for use of its valuable IP.

In the U.S. Tax Court ruling of November 2020, the IRS reallocated approximately $9 billion to the taxpayer from its foreign manufacturing affiliates. The ruling did not immediately determine how much the company owes, but the IRS had been seeking more than $3.3 billion for the tax years 2007 through 2009. The company announced an appeal to this ruling in January 2021. In a perfect world, Coca-Cola should receive offsetting tax deductions in the countries where its bottlers are located. In reality, this is often impossible, leading to a significant additional tax burden for the group as a whole. Coca-Cola is planning to challenge the ruling on constitutional grounds when it appeals the international tax case.


This case is reminiscent of a 14-year old case where Glaxo UK was found to underpay its U.S. subsidiaries for medicines that were developed in the UK but sold in the U.S. Ultimately, the company agreed to settle the dispute with the IRS for $3.1 billion and abandoned a $1.8 billion refund claim for excess income taxes. Adding insult to injury, despite the U.S. finding and payment, in this case the UK tax authorities refused to grant a corresponding reduction, leading to billions in double tax on the same income.

While tax authorities and courts position these disputes as between taxpayer and tax authority, they are also interpreted as disputes between tax authorities, each trying to maximize the revenues they can tax. As in the GlaxoSmithKline case, companies often stand to lose twice as countries claim competing revenue rights.

It is not surprising that the revenue generated within companies as opposed to between unrelated companies is a focus of tax authorities. Intercompany transactions represent an estimated 80% of global trade. Furthermore, intercompany transfers done internationally receive special scrutiny from regulatory authorities because of the perceived opportunity for multinationals to control both sides of the transaction.

Defense Begins with Transfer Pricing Discipline

Although the final battles of these cases may be fought by corporate tax attorneys, lobbyists, and PR teams, without a foundation of disciplined transfer pricing policies and practices, companies are at risk for more numerous tax enforcement actions and higher imposed settlements.

The best response to tax deficiency notices and defending against these claims are the efforts of corporate finance, accounting, tax, and shared services leaders who must buttress their transfer pricing policy with definitional clarity, granularity, and transparency of costs. Consider that the Glaxo UK case originally could have faced a demand of up to $15 billion in taxes and interest charges. Arguably, the company’s defense saved $10 billion against the final settlement.

If, perhaps, these horror stories of tax penalties and fines seem someone else’s nightmare, there are other more apparent risks associated with slack transfer pricing practices that haunt multinational finance, accounting, and tax teams:

  • Lack of visibility/examinability/documentation
  • Rolling intercompany balances/unreconciled balances
  • Financial reporting risk and delays
  • Uncertain tax positions in ambiguous, subjective, and continuously changing environments
  • The possibly of restatement

The external forces demanding improved intercompany accounting efforts combine with internal realities to add additional urgency to improved practices. Increased globalization means adhering to more local laws and reporting requirements; reconciling across additional legal entities and jurisdictions; and juggling multiple disparate finance, invoicing, and receivables systems. Add to the increased work volume a scarcity of qualified transfer pricing talent and the high cost of outsourced options and it becomes clear that getting control of transfer pricing processes is a corporate imperative.

Creating Control Around Transfer Pricing

At the center of transfer pricing best practices is accurate price setting. Section 482 of the IRS code protects government tax revenue by requiring transfer pricing determination is “at arm’s-length,” meaning transaction pricing between two related parties should be the same as it would be between two unrelated parties on the open market. IRC 482 applies to all nature of economic transfers for both COGS and direct costs including: material movement, long term assets, intangible assets, intercompany loans and services (more on that in a moment).

Determining supportable pricing rates has historically followed two paths – negotiations between related parties doing business together or, more commonly for large multinationals, through pricing set by the parent company for its subsidiaries.

Intercompany financial management experts recommend that transfer pricing be set by the parent company removing the temptation for a business unit to overestimate its own profitability. There is also a concern that individual business entities can struggle to accurately understand per-product profitability. Conversely, the corporate accounting and tax teams have visibility into the financials of all related entities making them better able to define contributions when facing a complex value chain. A recent survey by Deloitte found that this type of intercompany pricing is carried out most often by the tax team (39%) or by the CFO/finance director (38%).

Setting transfer pricing for intercompany services is notoriously trickier than products which offer more concrete costs and clearer comparables. Corporations understandably look to encourage subsidiaries to leverage internal services-based resources or global shared services. The temptation to offer subsidized or below cost pricing as incentives is understandable but flies in the face of transfer pricing guidelines and would cost the group cash tax. More problematic is the subjective nature of services and their related service charges, which accounts for most of the transfer pricing disputes with tax authorities.

Intercompany Financial Management

Intercompany financial management is a discipline for managing transactions within a corporation and between its legal entities. Designed to efficiently maximize accounting accuracy while optimizing tax exposure and ensuring regulatory compliance, these efforts go far beyond transfer pricing strategies to prepare and protect the organization.


Centralized management of intercompany processes, technology and master data create improved tax and resource efficiency while reducing operational costs. It also enables the transaction transparency required to recognize otherwise undiscovered business improvements and issues that may raise tax authority eyebrows. Critical functions enabled by centralization include management of contracts between related entities, reconciling of balances, settlement, and clearing, and reporting for finance and tax. This guards against local group entities creating a sub-optimal solution due to missing data points or a poor understanding of both sides of the transactions.

Process Automation

Data critical to intercompany accounting is commonly disjointed and is often managed manually. This creates slow, error-prone intercompany accounting and reporting. Automating these functions and integrating disparate ERPs radically improve accuracy. FourQ's OneBiller solution automates intercompany accounting by translating relevant data into compliant invoices and documentation to support intercompany transactions, real-time audits, and improved transaction transparency while reducing operational costs. For tax teams, the efficiency gained from process automation eliminates double taxation on complex agreements, improves accuracy of tax calculations at the time transactions are executed, and reduces overpayments based on estimates.

Improving process uniformity and consistency

The acquisition of new business entities, localized tax and regulatory requirements, the idiosyncrasies of vertical industry business practices and even the personalities of business unit leaders can thwart efforts to establish uniform processes across a complex multinational organization. The art of establishing company-wide process uniformity requires experienced intercompany pros. FourQ has guided consistency across customer organizations improving compliance and reducing risk. Uniformity and consistency are important defense lines in any transfer pricing audit as they communicate a sense of control and defend against disorder.


When the infamous American bank robber, William Grancis Sutton Jr., was asked why he robbed banks he replied, “Because that is where the money is.” This simple observation is not wasted on tax authorities. Multinational companies with complex legal entity structures must understand this and shore up global tax complexity against regulatory expansion and increasingly aggressive enforcement, particularly as nations are starved of revenue due to the global pandemic.

Preparing, protecting, and defending against this scrutiny requires more than shoring up transfer pricing strategy. FourQ experts provide on-going support for compliance, tax, transfer pricing, and process automation to help intercompany financial management run smoothly.

Begin advancing your intercompany financial management now by assessing your pain points, refining policies and procedures, and getting buy-in from cross-functional leadership teams. Find more guidance in our 10-Step Guide to Transforming the Intercompany Accounting Function.

FourQ Staff

Built by finance, accounting, and tax experts, FourQ is Intercompany Financial Management software that streamlines the global operations of the world’s largest companies. Providing automated intercompany processing seamlessly integrated with global vendor invoice management, FourQ helps multinational companies increase efficiency and improve global business operations. This increases operational productivity while saving millions of dollars annually through improved intercompany billing and payment and tax optimization. Discover why FourQ processes over $34 billion annually across 110 countries and how it can transform global operations at your organization.

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