COCA-COLA ESWATINI IN E108BN UNPAID TAX DISPUTE

MBABANE – Coca-Cola Eswatini (CONCO) and others have been cited in a long-standing court case emanating from a tax dispute in the USA.

The dispute was between CONCO’s mother company in the USA, The Coca-Cola Company (global business) and Internal Revenue Services (IRS), the equivalent of the Eswatini Revenue Services (ERS). On August 2, 2024, USA Judge Albert Lauber ruled in favour of the Internal Revenue Services in a case that had reached the tax court in 2015, touching on 2007-2009 financials for Coca-Cola Swaziland (Eswatini) and six other supply points. The other six supply points are Brazil, Chile, Costa Rica, Egypt, Ireland and Mexico.

Agreed to pay

The Cola-Cola Company (TCCC) has agreed to pay US$6 billion (E108 billion) to USA’s taxman. It was revealed in court that the supply points such as Swaziland (Eswatini) showed fairly steady increases in revenue before and during the tax years in issue. It was mentioned that the revenue consisted almost entirely of payments from bottlers for concentrate. Occasionally, it was heard that these supply points also sold concentrate to one another. Notably, in 2020, the USA Department of Treasury engaged with the Eswatini Revenue Service regarding a mechanism for exchange of tax information and money flows.

It was not immediately established whether the mechanism is presently operational. However, financials for Coca-Cola Eswatini and others from the financial years 2001 to 2009, showed some profits, which were declared in the USA, with the Internal Revenue Service (IRS) taking an interest in the matter. inter-company charges. According to papers, after deducting inter-company charges and direct expenses, Coca-Cola Eswatini reported operating profit for 2007, 2008, and 2009 as US$681 million, the equivalent of E12.25 billion at the current exchange rate.

The operating profit stood at E7.027 billion for the three financial years, as Lilangeni traded at 10.32 against the US dollar in 2009. Muzi Mahlobo, the General Manager of Coca-Cola Eswatini (CONCO LTD), forwarded our questionnaire about the matter to the global structure dealing with matter. Speaking to the Times of Eswatini SUNDAY, Scott Leith, Vice President, Global Strategic Communications, said The Coca-Cola Company had no comment beyond its current public disclosures.   

On August 2, 2024, the Coca-Cola Company (global business) issued a public statement on the matter.  This followed the court decision, which ruled in favour of the tax authorities.
In its statement, TCCC stated that the court decision reflects a liability of approximately US$2.7 billion, the equivalent of E48.57 billion. It said, with applicable interest, the total amount was anticipated to be approximately US$6 billion, which is about E108 billion. Coca‑Cola strongly believed the IRS and the Tax Court misinterpreted and misapplied the applicable regulations involved in the case.

Defend its position

It said it would vigorously defend its position on appeal. The company said it had 90 days to file a notice of appeal to the USA Court of Appeals for the Eleventh Circuit. The company looked forward to the opportunity to begin the appellate process. As part of the process, it said it would pay the agreed-upon liability and interest to the IRS, which is the amount of E108 billion. It explained that it received a notice, on September. 17, 2015, from the IRS seeking approximately US$3.3 billion (E59.37 billion) of additional federal income tax for years 2007 through 2009.

In the notice, the IRS stated its intent to reallocate over E162 billion (US$9 billion) of income to the US parent company from certain of its foreign affiliates retroactively, rejecting a previously agreed upon methodology without prior notice to the company. The foreign affiliates include Eswatini. According to The Coca-Cola Company, the IRS designated this matter for litigation on October 15, 2015, precluding the company from any, and all, alternative means of resolution other than going to court.

Issued an opinion

On November 18, 2020, Coca-Cola stated that the Tax Court issued an opinion in which it predominantly sided with the IRS. On November 8, 2023, the Tax Court issued a second related opinion also siding with the IRS on the remaining issue. Meanwhile, Coca-Cola Eswatini is arguably the country’s largest contributor to Gross Domestic Product (GDP). It is a major producer of concentrate –syrups and other ingredients in Africa. CONCO, has since been caught up in tax undercharging assertion levelled against its mother company, The Coca-Cola Company (TCCC). The allegations against TCCC were made in court by the Internal Revenue Services.

It must be said that Coca-Cola Eswatini is not alone in the fray as other supply plants from Brazil, Ireland, Chile, Costa Rica, Egypt, Ireland and Mexico were also flagged for alleged transfer pricing abuse –the price at which a transaction is made within a corporate family or group of companies under one umbrella. This is how it all began. Coca Cola Company, also known as CCC, is the legal owner of the intellectual property (IP) necessary to manufacture, distribute, and sell some of the best-known beverage brands in the world.This IP includes trademarks, product names, logos, patents, secret formulas and proprietary manufacturing processes.

Unrelated bottlers

The Coca-Cola Company licensed Coca-Cola Eswatini (CONCO) and foreign manufacturing affiliates, called ‘supply points,’ to use this IP to produce concentrate that they sold to unrelated bottlers. The bottlers then produced finished beverages for sale to distributors and retailers throughout the world. TCCC (The Coca-Cola Company)’s contracts with Coca-Cola Eswatini and other supply points gave them limited rights to use the IP in performing their manufacturing and distribution functions, but gave them no ownership interest in that IP.
During the 2007-2009 financial years, which have been a centre of scrutiny since 2015 to August 2, 2024, CONCO and other supply points compensated TCCC for use of its IP.

The compensation was done under a formulary apportionment method to which The Coca-Cola Company and Internal Revenue Services had agreed in 1996 when settling TCCC’s tax liabilities for 1987-1995. Under that method, it meant that Coca-Cola Eswatini and other supply points were permitted to satisfy their royalty obligations by paying actual royalties or by remitting dividends. During 2007-2009, Coca-Cola Eswatini and other affiliates jointly remitted royalties to TCCC amounting to US$1.8 billion, the equivalent of E32.3 billion at the current foreign exchange rate.

Pricing methodology

However, it turned out that the 1996 agreement did not address the transfer pricing methodology to be used for years after 1995. Upon examination of TCCC’s 2007-2009 returns, the Internal Revenue Services determined that The Coca-Cola Company methodology did not reflect arm’s-length norms, because it over-compensated Coca-Cola Eswatini and other supply points and undercompensated the taxable owner of the Intellectual Property, being TCCC. Then, the tax authorities in the USA reallocated income between TCCC and Coca-Cola Eswatini and others, employing a comparable profits method (CPM). It meant the same tax rate charged on unrelated bottlers was then imposed on TCCC.These adjustments increased The Coca Cola Company’s aggregate taxable income for 2007-2009 by more than US$9 billion, the equivalent of E161 billion.  

What is transfer pricing?

Suppose, for example, an automotive manufacturer in Eswatini sells its vehicles in Zimbabwe. It effectively means that the Eswatini manufacturer needs to export (sell) those vehicles to its subsidiary in Zimbabwe.  Therefore, the price at which the transaction is made between Eswatini and Zimbabwe is the transfer price. The tax paid in each country differs.
The trick is here; with the following illustration probably showing what might have happened in the case of The Coca-Cola Company International and its subsidiaries or supply plants such as Coca-Cola Eswatini and others.

Based on USA’s Delloite expert advice on transfer pricing taxation, suppose the amount of the transfer price differs from the price at which the transaction is made with a third-party company which does not belong to the group. For instance, selling to a company that is not part of the Eswatini Automotive Firm at a different price is called ‘arm’s length price.’
In this case, tax is charged by deeming the transaction to be one made at the arm’s length price. To simply it, for example, Eswatini Automotive sells its vehicle to its Zimbabwe subsidiary at a transfer price of E120 000.

It also sells the same product to companies outside the corporate group at a price of E180 000. In this case, the Eswatini Revenue Service (ERS), for example, will deem Eswatini Automotive to have transferred a profit of E60 000 to its Zimbabwe subsidiary. The tax is then imposed on the price of E180 000, which is the same as the price at which the product is sold to a third party.Companies like Coca-Cola are then complaining that this format results in double taxation, because the amount of tax paid in the overseas country is not reduced accordingly.

Excessive burden

This, they argue, imposes an excessive burden on them. However, governments and tax authorities around the world, mainly the USA, are of the view that transfer pricing, from a tax point of view, is vulnerable to abuse. Tax authorities in the USA suspect that subsidiaries and affiliates in different countries manipulate the prices to shift income away from the United States. This may not be the case with The Coca-Cola Company and its subsidiaries in Eswatini and others, but there are complaints that some companies report more profit in jurisdictions with comparatively low tax rates, thereby raising the profits of the group overall.

This manipulation is typically accomplished by causing the corporate subsidiary in the United States (or other ‘high tax’ jurisdiction) to sell goods to the foreign subsidiary at below market rates, or to buy goods from that foreign subsidiary at above market rates, so that any profit from the ultimate sale of those goods to a third party is attributed to the foreign subsidiary. It must be said that Section 482 of the US’s Internal Revenue Services Code is designed to prevent this sort of transfer pricing abuse.Under IRS Code Section 482, it is provided that the tax authority may re-allocate income between related entities if necessary to prevent tax evasion or to reflect the true income of the relevant businesses.

What supply points do?
Supply points such as Eswatini and others produced ‘concentrate’—syrups, flavourings, powder and other ingredients—used in the production of The Coca-Cola Company’s branded soft drinks (including Coca-Cola, Fanta and Sprite) and other non-alcoholic, ready-to-drink beverages. These affiliates like Coca-Cola Eswatini sold and distributed those concentrates to hundreds of Coca-Cola bottlers in Europe, Africa, Asia, Latin America and Australasia. It has been established that the bottlers, most of which were independent of The Coca-Cola Company, ranged from small family-owned businesses to large multinational companies. The bottlers used this concentrate to produce finished beverages that they marketed (directly or through distributors) to millions of retail establishments throughout the world (excluding the United States and Canada).

Because the foreign manufacturing affiliates supplied concentrate to bottlers, these affiliates are often called “supply points,” Coca-Cola Eswatini is then referred to as a supply point.
Times SUNDAY’s unanswered questions to Coca-Cola International. On August 2, 2024, the US Tax Court completed the next step in the legal process by entering a decision in the ongoing tax case between The Coca‑Cola Company and the US Internal Revenue Service. The decision reflects a liability of approximately US$2.7 billion. With applicable interest, the total amount is anticipated to be approximately US$6.0 billion. Mr Mahlobo, as the GM for Coca Cola’s plant in Eswatini, how would this ruling affect Coca Cola Eswatini?
The US Tax Court heard that deficiencies in taxes resulted from transfer pricing adjustments under Section 482 by which the IRS reallocated substantial amounts of income to petitioner, chiefly from its foreign manufacturing affiliates such as Eswatini, formerly Swaziland.  Will Coca-Cola Eswatini contribute to the payment of the US$6 billion and by how much Hon. GM?

What lessons has Coca-Cola Eswatini learnt from this case which started over a decade ago?
Did Coca-Cola Eswatini have a legal representative during the case or the Head Office was wholly responsible for the legal issues? Coca-Cola Head Office issued a statement to the effect that it is determined to defend itself on appeal, has the leadership in Eswatini familiarised themselves with this case?

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