In TC opinion of 18 November 2020 the US Tax Court agreed with the US tax authorities (IRS) that Coca-Cola’s US-based income should be increased by $9 billion in a dispute over royalties from its foreign-based licensees. The principal holding was that the Commissioner did not abuse his discretion in reallocating income to Coca-Cola using a “comparable profits method” (TNMM) that treated independent Coca-Cola bottlers as comparable parties. However, one question remained. Coca-Colas’s Brazilian subsidiary paid no actual royalties to Coca-Cola during 2007–2009. Rather, it compensated Coca-Cola for use of its intangibles by paying dividends of $886,823,232. The court held that the Brazilian subsidiary’s arm’s-length royalty obligation for 2007–2009 was actually about $1.768 billion, as determined by the IRS. But the court held that the dividends remitted in place of royalties should be deducted from that sum. This offset reduces the net transfer pricing adjustment to petitioner from the Brazilian supply point to about $882 million. Thus, the issue to be decided is whether this $882 million net transfer-pricing adjustment is barred by Brazilian law. During 2007–2009 Brazil capped the amounts of trademark royalties and technology transfer payments (collectively, royalties) that Brazilian companies could pay to foreign parent companies. Coca Cola contended that Brazilian law blocked the $882 million net transfer-pricing adjustment. IRS contended that the Brazilian legal restriction should be given no effect in determining the arm’s-length transfer price, relying on what is commonly called the “blocked income” regulation (Treas. Reg. § 1.482-1(h)(2)). According to tax authorities the “blocked income” regulation generally provides that foreign legal restrictions will be taken into account for transfer-pricing purposes only if four conditions are met, including the requirement that the restrictions must be “applicable to all similarly situated persons (both controlled and uncontrolled).” Judgement of the tax court The Tax Court sustained the transfer pricing adjustment in full. Excerpts “Allocation of Value Between Grandfathered Intangibles and Those Not Grandfathered Petitioner has shown that eight of TCCC’s trademarks were li-censed to the supply point before November 17, 1985. Those are the only intangibles in commercial use during 2007–2009 that were covered by the grandfather clause. We find that petitioner has failed to carry its burden of proving what portion of the Commissioner’s adjustment is at-tributable to income derived from this (relatively small) subset of the licensed intangibles. And the record does not contain data from which we could make a reliable estimate of that percentage.” “Because the supply point sold concentrate to preordained buyers, it had no occasion to use TCCC’s trademarks for economically significant marketing purposes. By contrast, the bottlers and service companies were much heavier users of TCCC’s trademarks. The bottlers placed those trademarks on every bottle and can they manufactured and on every delivery truck in their fleet. See id. at 264. And the service com-panies, which arranged consumer marketing, continuously exploited the trademarks in television, print, and social media advertising. See id. at 240, 263–64.” “We conclude that all non-trademark IP exploited by the Brazilian supply point was outside the scope of the grandfather clause. The blocked income regulation thus applies to that portion of the transfer-pricing adjustment attributable to exploitation of those intangible as-sets. We further find that this non-trademark IP represented the bulk of the value that the Brazilian supply point derived from use of TCCC’s intangibles generally. Petitioner has supplied no evidence that would enable us to determine, or even to guess, what percentage of the overall value was attributable to the residual intangible assets, i.e., the trademarks.” “In sum, petitioner has failed to satisfy its burden of proof in two major respects. It has offered no evidence that would enable us to determine what portion of the transfer-pricing adjustment is attributable to exploitation of the non-trademark IP, which we have found be the most valuable segment of the intangibles from the Brazilian supply point’s economic perspective. And petitioner has offered insufficient evidence to enable us to determine what portion of the transfer-pricing adjustment is attributable to exploitation of the 8 original core-product trademarks, as opposed to the 60 other core-product trademarks and the entire universe of non-core-product trademarks. Because petitioner has failed to establish what portion of the aggregate transfer-pricing adjustment might be attributable to exploitation of the eight grandfathered trademarks, we have no alternative but to sustain that adjustment in full.” ...

SA Tropicana Europe Hermes is a French permanent establishment of SA Tropicana Europe, located in Belgium. The French PE carried out the business of bottling fruit juice-based drinks. In 2009, a new distribution contract was concluded with the Swiss company FLTCE, which was accompanied by a restructuring of its business. Before 1 July 2009, Tropicana was engaged in the manufacture of fresh fruit juices in cardboard packs and purchased fresh fruit juices which it pasteurised. As of 1 July 2009, its activity was reduced to that of a contract manufacturer on behalf of FLTCE, which became the owner of the technology and intellectual property rights as well as the stocks. The re-organisation led to a significant reduction in the company’s turnover and profits. Tropicana Europe was subject to two audits, at the end of which the tax authorities notified it of tax reassessments in respect of corporate income tax, withholding tax and business value added contribution (CVAE) for the years 2010 to 2013, together with penalties. It also notified the company of tax adjustments, together with penalties, in respect of the additional contribution to corporation tax for the years 2012 and 2013. According to the tax authorities Tropicana Europe’s new contract was not at arm’s length and constituted an abnormal act of management. Tropicana filed an appeal with the Administrative Court, where the assessment issued by the tax authorities was later set aside. An appeal was then filed by the tax authorities with the Court of Appeal. At issue was whether FLTCE was located in a privileged tax regime and whether there was a link of dependence between Tropicana and FLTCE and thus the basis of the tax assessment. Judgement of the Court of Appeal The court dismissed the appeal of the tax authorities and upheld the decision of the administrative court. Excerpts “As regards the existence of a privileged tax regime : 6. Before the first judges, Tropicana Europe disputed that FLTCE was established in a country with a privileged tax regime within the meaning of the second paragraph of Article 238 A of the General Tax Code. The first judges considered that by simply relying on the overall corporate tax rate of 13% in the canton of Bern, in the Swiss Confederation, where FLTCE’s head office is located, and the significant difference between this rate and the corporate tax rate of 33.33% in France, the tax authorities did not establish that FLTCE was established in a country with a privileged tax regime, the tax authorities did not establish that the amount of income tax to which FLTCE is subject is less than half the amount of income tax for which it would have been liable under the conditions of ordinary law in France, if it had been domiciled or established there, and, consequently, that FLTCE would be subject to a preferential tax regime pursuant to the aforementioned provisions of Article 238 A of the French General Tax Code. As this ground of the judgment is not contested on appeal by the Minister, the latter must be considered as renouncing to rely on the establishment of FLTCE in a country whose tax regime is privileged pursuant to the provisions of Article 238 A of the General Tax Code. Consequently, the Minister bears the burden of proof of the existence of a link of dependence between Tropicana Europe and FLTCE.” “As regards the existence of a link of dependence : 7. In order to discharge Tropicana Europe from the taxes it was contesting, the first judges noted that, in order to establish a relationship of dependence between this company and FLTCE, the tax authorities based themselves on the fact that these two companies belonged to the same multinational group, PepsiCo, and deduced that, by relying solely on this factor, the authorities, who bear the burden of proof, did not establish any relationship of dependence between the two companies within the meaning of Article 57 of the General Tax Code. 8. In order to prove the existence of a relationship of dependence between Tropicana Europe and FLTCE, the Minister noted that SA Tropicana Europe Hermes is a permanent establishment of SA Tropicana Europe, located in Belgium, which is 99.99% owned by Seven’Up Nederland BV, which in turn is wholly owned by Pepsico Inc. FLTCE, located in Switzerland in the canton of Bern, is wholly owned by Frito Lay Compagny Gmbh, also located in Switzerland in the same canton. This company has been controlled since 14 December 2011 by PepsiCo Limited located in Gibraltar. While the Minister deduces from all these facts that SA Tropicana Europe and FLTCE are sister companies under the control of the PepsiCo group, he does not provide evidence of legal dependence between SA Tropicana Europe and FLTCE, which are not linked by a capital link between them. Consequently, it is up to the Minister to provide proof of the existence of a de facto dependency link between these two companies. However, the Minister did not provide any other element or indication that would make it possible to detect a de facto dependence between these two companies other than the fact that they belong to the same group. The fact that the two companies belong to the same group does not, in the present case, constitute sufficient proof or evidence of de facto dependence between SA Tropicana Europe and FLTCE in the absence of any other element put forward by the Minister. Consequently, the Minister is not entitled to maintain that, contrary to the assessment made by the first judges, the conditions for the application of Article 57 of the General Tax Code were met in order to base the taxes for which the Administrative Court of Amiens granted discharge.” “As regards the request for substitution of legal basis : … 12. However, this reorganisation was not limited to a simple “change in the invoicing circuit” as the Minister maintains, but led to a significant change in operating conditions since, before 1 July 2009, Tropicana Europe was engaged ...