Multinationals Warned on Coke’s $41 Million Israel Tax Claim

Trust Bloomberg Tax's Premier International Tax offering for the news and guidance to navigate the complex tax treaty networks and business regulations.

By Matthew Kalman

Israel’s $41 million tax demand from the Coca-Cola Co. on royalties from its Israeli licensee could mark the start of a wave of claims against U.S. and other multinationals with similar business operations in the country.

That could lead to a conflict with U.S. and other authorities about which country is entitled to receive some taxes, practitioners say.

The Israel Tax Authority is claiming 150 million shekels ($41.4 million) from Coca-Cola in a dispute over the tax rate to be applied to about 1 billion shekels in payments over several years from the Central Bottling Co. in Bene Brak, which has held the Coca-Cola franchise in Israel since 1968.

“I guess that there will be more,” said Eldar Ben-Ruby, who leads the tax law group at Meitar Liquornik Geva Leshem Tal in Ramat Gan. “There are quite a few cases where there are international issues at stake.”

“The Tax Authorities are becoming, some would say daring, some would say aggressive, in challenging larger taxpayers and challenging issues into which they never looked before,” Ben-Ruby told Bloomberg BNA Aug. 6.

Ben-Ruby said he had represented a “household name” in a similar case in the past and is now representing a multinational pharmaceutical company that has been challenged by the authority. “They are trying to re-characterize part of its international income and bring it to Israel,” he said. “There are constant discussions and disputes about the taxation of the energy-related companies,” he added.

Withholding Tax

The claim against Coca-Cola hinges on the withholding rate on payments from the Israeli licensee that the Israeli authority views as taxable. Royalties are taxed at a regular rate of 10 percent, rising to 15 percent for industrial usage like the secret Coca-Cola formula, said Simon Yaniv, a tax law partner at Barone and Co. in Tel Aviv and a former large companies inspector at the Israel Tax Authority. But if the payments were for marketing or advertising services provided by the U.S. company, there would be zero tax to pay, and the Israeli licensee might consider them deductible business expenses.

“I saw several similar disputes when I worked at the tax authority where we dealt with issues of royalties,” Yaniv told Bloomberg BNA Aug. 6. “These matters are usually kept private and settled without publicity. This is one of the biggest I’ve seen.”

If the tax authority claim is upheld, it won’t have to collect the funds from Coca-Cola’s Atlanta headquarters.

“According to the Israeli Tax Ordinance, as well as various tax treaties, including the Israeli-US treaty, Israel is entitled to charge withholding tax, if the payments classify as ‘royalties’. This is considered to be income accruing in Israel, even if no permanent establishment is present in Israel,” said Yaniv Shekel, a senior partner at Shekel and Co. law offices in Tel Aviv who represented Hewlett-Packard Enterprises in a recent tax dispute with the Israeli authorities.

The tax authority can either charge the Israeli licensee a higher withholding rate or “issue a tax assessment directly to Coca-Cola and enforce it through a lien on future payments” from the Israeli company, Shekel told Bloomberg BNA in an Aug. 2 email.

Conflict Among Tax Authorities

Ben-Ruby, the former inspector, said the authority’s “willingness to confront multinationals operating in Israel with respect to what part of the global income should be attributed to Israel,” might lead to potential conflict with other national tax authorities.

“If income is shifted to Israel, it’s being shifted away from the U.S. or wherever Coca-Cola picked up this income. This would lead to discussions with the competent authorities of the two countries to make sure there is no double taxation. Assuming it’s the U.S., the U.S. would probably be reluctant to give up its share of this income,” he said.

In March, the Central Bottling Co. was fined 62.7 million shekels by Israel’s Antitrust Authority for abusing its dominant position in the country’s soft drinks market. The company’s other products include juices, bottled water, iced tea, and dairy products that account for about two-thirds of sales of all Israeli soft drinks, according to Euromonitor International.

U.S. Dispute

Even if the Israeli tax claim is upheld, it pales into insignificance alongside other matters pending on Coca-Cola’s balance sheet. In its most recent financial report for the quarter ended June 30, 2017, the company updated shareholders about a U.S. federal income tax dispute relating to the years 2007-2009 in which the IRS claims that the company owes additional federal tax of “approximately $3.3 billion for the period, plus interest.”

According to the company’s Form 10-Q Securities and Exchange Commission filing, the amount in dispute relates mostly to “a transfer pricing matter involving the appropriate amount of taxable income the Company should report in the United States in connection with its licensing of intangible property to certain related foreign licensees regarding the manufacturing, distribution, sale, marketing and promotion of products in overseas markets.”

Coca-Cola has retained Israeli law firm Goldfarb Seligman to represent the company in Israel. The lawyers and the Israel Tax Authority said they couldn’t comment on confidential tax discussions.

The U.S.-based Coca-Cola Co. declined to comment on Aug. 2. The Israeli-based Central Bottling Co. didn’t respond to an Aug. 2 request for comment.

To contact the reporter on this story: Matthew Kalman in Jerusalem at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax