What the Coca-Cola Transfer Pricing Case Means for Multinational Businesses

Key Takeaways

• Transfer pricing should be reviewed regularly, not treated as a one-time exercise.
• The Coca-Cola tax case highlights the risks of relying on outdated transfer pricing documentation.
• Prior IRS acceptance of a transfer pricing method does not guarantee future compliance.
• Annual transfer pricing reviews can help multinational businesses reduce audit risk and support arm's-length pricing.

When Coca-Cola finds itself at the center of an $18 billion tax dispute, it's easy to view the case as a problem unique to one of the world's largest companies. For decades, Coca-Cola's methodology for allocating profits between the U.S. parent and its foreign manufacturing affiliates has been under IRS scrutiny. The dispute is now before the Eleventh Circuit Court of Appeals, which heard oral arguments on June 25, 2026.

For multinational businesses of all sizes, the ongoing litigation serves as an important reminder: transfer pricing isn't something you can establish once and assume will remain defensible forever. Most companies do not have Coca-Cola's legal budget. That is exactly why the case is worth paying attention to.

While the outcome of Coca-Cola's appeal remains uncertain, one lesson is already clear. Transfer pricing arrangements should evolve alongside your business. Relying on methodologies that were developed years, or even decades, ago without periodically validating that they still reflect economic reality can expose companies to significant tax risk.

A Short History of a Long Case

The dispute between Coca-Cola and the IRS stems from the company's transfer pricing practices for transactions with certain foreign subsidiaries.

The story begins with an IRS transfer pricing audit covering Coca-Cola's 1987 through 1995 tax years. To resolve it, the IRS and the company agreed in 1996 on a formula known as the 10-50-50 method: the foreign supply points manufacturing beverage concentrate would earn a 10% margin on sales to independent bottlers, and the residual profit would be split evenly between the foreign affiliate and the U.S. parent.

Coca-Cola kept using that formula. When the IRS examined the 2007 through 2009 tax years, it rejected the approach, applied the Comparable Profits Method instead, and reallocated roughly $9 billion of income to the U.S. parent (about $2.7 billion in additional tax).

The Tax Court sided with the IRS in 2020. Its reasoning was blunt: the 1996 closing agreement resolved a specific dispute for specific years. It said nothing about what method would govern afterward.

If Coca-Cola's appeal fails and the same methodology is applied to the years since 2009, the company's total exposure is estimated at approximately $20 billion. The company has reserved $493 million.

Why the Numbers Didn't Hold Up

During the years at issue, Coca-Cola's Irish affiliate reported a return on operating assets of roughly 215%. The Chilean affiliate reported about 149%. The consolidated global company earned approximately 53% over the same period. The court noted that these supply points were outperforming nearly every food and beverage company in the world, while the U.S. entity that actually owned the intangibles driving that profitability earned far less.

That is the question any examiner will ask, and it does not require a specialist to see the problem. If your foreign subsidiary is dramatically more profitable per dollar of operating assets than your consolidated business, your documentation needs to explain why in terms that hold up to scrutiny.

The Bigger Lesson: Transfer Pricing Shouldn't Be Static

For many businesses, the most valuable takeaway isn't the legal arguments being made in court. It's what the case illustrates about maintaining transfer pricing documentation over time.

Business conditions are constantly changing.

Markets evolve. Supply chains shift. Profitability changes. New products are introduced. Customer demand fluctuates. Technology transforms industries. Relationships between related entities mature or take on new responsibilities.

That's why transfer pricing shouldn't be viewed as a one-time compliance exercise. It should be treated as an ongoing process of evaluating whether your intercompany pricing continues to reflect how unrelated third parties would transact under similar circumstances.

Coca-Cola’s reliance on a previously accepted methodology underscores an important point: prior IRS acceptance doesn’t provide permanent protection. As business and economic conditions change, companies must continue to substantiate that their transfer pricing reflects current market conditions and the arm’s-length standard.

Documentation Matters Just as Much as the Methodology

Transfer pricing isn't only about arriving at the right answer. It's also about being able to support it.
Contemporaneous documentation remains one of the strongest tools companies have when responding to IRS scrutiny. Documentation should clearly explain:

• Why the chosen methodology is appropriate
• How comparable data was selected
• What functions, assets, and risks each related entity assumes
• Why the resulting allocation reflects an arm's-length outcomes

Perhaps most importantly, documentation should be revisited regularly.

If your business has expanded into new markets, restructured operations, changed supply chains, acquired new intellectual property, or experienced significant shifts in profitability, your transfer pricing analysis should reflect those developments.

The goal isn't simply to have documentation on file. It's to have documentation that accurately reflects today's business.

What This Means for Your Business

Reevaluate annually. Business models change. Supply relationships change. Industries change. A methodology that reflected economic reality in 1995 has no particular claim to reflecting it in 2026.

Maintain contemporaneous documentation. Documentation prepared alongside the transactions it supports, updated as the business changes, and specific enough to defend the numbers it produces.

Make sure the result is realistic. The arm's-length standard is not a technicality. An allocation that produces returns your operating footprint cannot explain will read as profit shifting, whatever the method is called.

A Practical Checklist for Multinational Businesses

The Coca-Cola case provides a useful opportunity for multinational companies to evaluate their own transfer pricing practices.

Consider asking:

• When have we last evaluated our transfer pricing documentation?
• Have our operations changed since then?
• Have market conditions or industry economics shifted?
• Are our intercompany agreements still appropriate?
• Would we be comfortable providing our documentation to the IRS if we were audited today?

If any of those questions raise uncertainty, it may be time to revisit your transfer pricing strategy.

Regular reviews can help identify issues before they become costly disputes and provide greater confidence that your pricing remains defensible.

Even If Coca-Cola Prevails, the Lesson Doesn't Change

Some observers have suggested the appellate court may be sympathetic to portions of Coca-Cola's arguments. Whether that changes the outcome remains to be seen.

But even if Coca-Cola succeeds on appeal, the broader lesson for businesses remains.

The company has spent years litigating, devoted significant resources to its defense, and incurred substantial legal and professional costs—all while facing billions in potential tax liability.

Most businesses don't have the resources for that kind of prolonged dispute. Compare those costs to a transfer pricing study and ask whether your business could absorb even a fraction of that fight.

Regular transfer pricing reviews and robust documentation are typically far less costly than defending outdated positions during an IRS examination.

Looking Beyond the Headlines

At the end of a transfer pricing analysis, there is a straightforward question. If the IRS asked for your documentation tomorrow, would you feel comfortable handing it over?

When the IRS identifies an area where meaningful revenue is available, it commits real attention to it. Transfer pricing is one of those areas. It is not something to set aside.

If it has been more than a year since you last reviewed your transfer pricing, now is the time.

VSH works with multinational businesses on transfer pricing studies, contemporaneous documentation, and cross-border planning between the U.S. and Canada. Contact us to discuss where your current position stands.

FAQs

1. What is the 10-50-50 method?

The 10-50-50 method was a profit-split formula Coca-Cola and the IRS agreed to in a 1996 closing agreement resolving an audit of the 1987–1995 tax years. Under it, Coca-Cola's foreign supply points earned a 10% margin on concentrate sales to independent bottlers, and the remaining profit was split evenly between the foreign affiliate and the U.S. parent. Coca-Cola continued applying the formula after 1995; the IRS rejected it for the 2007–2009 years.

2. Can the IRS change a transfer pricing method it previously accepted?

Yes. The Tax Court held that a closing agreement resolving a specific audit for specific years does not bind the IRS for later years unless it says so. Prior acceptance of a method — even acceptance formalized in a settlement — does not create a right to keep using it indefinitely.

3. How often should a company update its transfer pricing documentation?

Annually, and sooner if the business changes materially. The IRS expects contemporaneous documentation — an analysis prepared at or near the time the intercompany transactions occur, setting out the method used, the comparable data supporting it, and the reasoning behind the allocation. A study prepared years ago will generally not substantiate current-year positions, because the business, industry, and comparables it relied on have moved.

4. Does a tax treaty protect my company from transfer pricing adjustments?

No. A tax treaty can affect how double taxation is resolved, but it does not exempt related-party transactions from arm's-length scrutiny. Transfer pricing between U.S. and Canadian related parties is examined closely, and companies operating across that border should maintain current studies and documentation.

5. What triggers IRS scrutiny of transfer pricing?

Results that are difficult to explain in economic terms. In Coca-Cola's case, foreign affiliates performing routine contract manufacturing reported returns on operating assets far above the consolidated company's — while the intercompany contracts assigned the valuable intangibles to the U.S. parent. Allocations that a third party would not accept, methods applied without periodic review, and documentation that contradicts the underlying agreements all invite examination.

This article is intended for informational purposes only and should not be construed as tax or legal advice. Businesses should consult with their tax advisor regarding their specific circumstances.