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Coca-Cola: what TP policy would you have recommended?

Intercompany Agreements

14 November 2022

If you follow me on LinkedIn, you'll know that I like to ask questions, shine a light on issues that people might not have considered, and hear others' views. It's LinkedIn's greatest strength, I think: bringing the tax, transfer pricing and legal community together to share ideas and insights. It's great that people are so generous with their expertise.

I recently posted about the Coca-Cola case, asking 'What TP policy would you have recommended?', and this sparked such an interesting discussion that I wanted to share it here and give our blog readers a chance to contribute.

As you’ll remember, one of the central issues in the case related the so-called 10/50/50 profit split arrangements between The Coca-Cola Company (TCCC) on the one hand, and local 'supply points' on the other. The ‘supply points’ in question engaged in the manufacture and distribution of concentrate, which was supplied to separate ‘bottlers’. The bottlers produced and distributed the actual beverages.

And just to remind you, the court’s assessment at page 188 of its judgment was as follows: “The Coca-Cola System is an extremely sophisticated and complex operation, but nearly all of its complexity is external to the supply points. They engaged in routine manufacturing, mixing ingredients specified by petitioner according to manufacturing protocols supplied by petitioner. In essence, they were wholly-owned contract manufacturers.”

I think it's clear that in this instance Coca-Cola were far too casual in their approach to their TP and its implementation. But that's all in the past now.

Looking forward: what TP policy (implemented through appropriate agreements) would you recommend if you were helping a multinational group with a similar fact pattern in terms of its operations?

Here are just two of many insightful comments.

Borys Ulanenko said: "On a TP policy level, I generally agree with the IRS's suggestions (i.e. introduction of limited risk entities). Then, it would be important to consider operational transfer pricing and compliance aspects (i.e., better control, regular margin reviews, and updates, etc., as well as robust TP documentation) ... One of the options is to treat supply points as contract manufacturers and apply comparable profits method / TNMM. The PLI – net cost plus. IRS suggested return on assets, though, in practice, it's very challenging from an operational perspective."

Jonathan Braithwaite made a very interesting observation: "I am surprised at Coca-Cola’s marketing and branding. Relatively little use of social media and digital marketing platforms for an OG like Coca-Cola. In the last Amazon case, the IRS just could not understand the Amazon valuation. Even though Amazon did not model or explain the network effects their business had due to user base in international markets and jurisdictions ... I looked at Coca-Cola across five platforms and for such a huge global brand it was surprising. They have 3M followers on Twitter. Insta, Tiktok, very few. Coke is missing a major trick by not connecting with users in markets they are distributing in. I think digitally deploying content to consumers will have significant impact on the intercompany agreements for marketing the Coca-Cola brand."

What do you think? I'd really like to know.

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Article by
Paul Sutton
LCN Legal Co-Founder

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