Coca-Cola smacked again over auditor EY-developed tax avoidance schemes
Why are PwC and EY still allowed to design and sell aggressive tax avoidance strategies to audit clients, including in Australia?
United States Tax Court Judge Albert Lauber told The Coca-Cola Company on Friday that it absolutely, definitely owes the IRS billions. From the WSJ:
A U.S. Tax Court judge has ruled that Coca-Cola is on the hook for about $2.7 billion, or about $6 billion including interest, in a long-running dispute with the Internal Revenue Service.
It's a dispute that has been going on a long time, and that I wrote about in November 2020, when the Tax Court agreed with most of the IRS' arguments and that was reaffirmed again in November 2023, when the Tax Court issued a second related opinion also siding with the IRS on the remaining issue.
I wrote about the case back in 2020 because, in a brazen example of total disregard for the SEC's auditor independence rules and securities laws, an EY partner testified in tax court, at the request of the IRS, related to the work done for its audit client Coca-Cola to defend his work preparing a “master platform document” that provided a basis for transfer pricing reports that Coke ServCos filed with their local taxing jurisdictions.
I wrote in November 2020 that Coca-Cola's tight relationship with EY, its auditor since 1921 — more than 100 years — may be why Coke asked EY in 2007 to help it reduce its federal tax bill. EY has been paid a lot extra over the years to create and support plans the IRS is criticizing again to shift profits to foreign affiliates in Brazil, Ireland, and several other countries with lower corporate tax rates, plans that are now going to cost Coca-Cola $6 billion.
From the 2020 Tax Court’s decision:
In 2008 the Company contracted with Ernst & Young (E&Y) to analyze the services provided by ServCos to Export. E&Y agreed to prepare a “master platform document” that would provide a basis for transfer pricing reports that ServCos were required to file with their local taxing jurisdictions.
E&Y ultimately produced two master platform documents from which it prepared about 30 local transfer pricing reports. E&Y concluded in these documents that the cost-plus compensation outlined in the ServCo agreements was within an arm’s-length range. In support of this conclusion E&Y noted that TCCC controlled the ServCos’ annual budgets, provided major inputs to their marketing efforts, and supplied final approval for all business plans.
At trial an E&Y partner testified that all of these transfer pricing reports “were written based on the [ServCo] contract[s] and the cost-plus nature of the service provided” by the ServCos, which he described as “the exact standard required [under the] transfer pricing analysis paradigm in effect in every country at the time.”
Coca-Cola said in a press release that it "strongly believes the IRS and the Tax Court misinterpreted and misapplied the applicable regulations involved in the case and will vigorously defend its position on appeal."
However, in its most recent 10-Q, filed with the SEC on July 29, Coca-Cola said that it "expects to pay such amounts at some point between the issuance of the Tax Court decision and the date the amounts are due pursuant to the notice of collection from the IRS."
Coca-Cola estimates that the payment to be made related to the 2007 through 2009 tax years will be approximately $6.0 billion (including interest accrued through June 28, 2024), plus any additional interest accrued and that this amount is "included in the above estimate of the potential aggregate incremental tax and interest liability".
The total bill could be as high as $16 billion if, as Coca-Cola said, the IRS applies its methodology on pricing with foreign affiliates for the subsequent years 2010 through 2023.
Has the SEC or audit regulator PCAOB ever sanctioned EY for this brazen disregard for auditor independence rules?
No.
