FLORIDA — The Coca-Cola Company and the Internal Revenue Service will begin oral arguments on Thursday in a Florida court regarding a dispute over transfer pricing. The dispute could lead to Coca-Cola facing a tax bill of approximately $20 billion.

Coca-Cola is appealing a 2020 US Tax Court ruling that affirmed an IRS finding that the company underreported profits from transactions involving its foreign subsidiaries. The IRS first notified Coca-Cola in 2015 that it owed billions in back taxes after concluding the company undercharged its units in Ireland, Brazil, Chile, Mexico, Costa Rica, Egypt, and Eswatini.

The current dispute has origins dating back to 1996, when Coca-Cola and the IRS settled a tax audit for liabilities from 1987 to 1995. Under the pricing formula agreed upon in that 1996 settlement, Coca-Cola's foreign affiliates were permitted to retain a profit equal to 10 percent of their gross sales. The remaining income after this 10 percent retention was split evenly between Coca-Cola's US headquarters and the overseas unit.

Coca-Cola argues that it should be able to continue using the pricing formula established in 1996. The IRS contends that the terms of the 1996 settlement should not apply to Coca-Cola's tax liabilities arising from audits conducted in 2007, 2008, and 2009. Coca-Cola stated the IRS "misinterpreted and misapplied the applicable regulations."

Alex Martin, an expert in transfer pricing at the tax consulting firm KBKG, said, "The IRS audited Coca-Cola because the company was earning astronomical profits in Ireland and a few other countries." Reuven Avi-Yonah, an expert in taxation law at the University of Michigan Law School, said, "It is important because it is the first clear victory of the IRS in this kind of case involving profit shifting out of the US in many decades, so if it is upheld on appeal, more companies may be inclined to settle rather than litigate."

In 2024, Coca-Cola agreed to pay the IRS $6 billion in back taxes and interest while preparing its appeal. The company could be liable to pay an additional $14 billion if the US Court of Appeals for the Eleventh Circuit rules in favor of the government. Coca-Cola has expressed confidence that its appeal will be successful.