Pepsi Wins Court Battle Against the IRS

PepsiCo Inc won a victory against the Internal Revenue Service this week. The resolution of the $343 million dollar dispute will certainly have far-reaching implications for companies attempt to avoid taxes as they bring cash from foreign countries into the United States.

The decision gets to the essence of a debate that has been going on in corporate finance and tax law in regards to equity and debt, each of which allows certain advantages. There are times when companies try to “have their cake and eat it too” financially speaking, creating hybrid securities that can look like either equity in one instance, or debt in another.

Since the 1990’s, Pepsi has had a base in the Netherlands for its attempts to surpass Coca-Cola Co in European and Asian markets. The practice in question, that of composition of hybrid securities that had dual identities—as debt in the Netherlands but equity in the United States—was deemed “legitimate tax planning” by Tax Court Judge Joseph Goeke.

Tax lawyers for PepsiCo argued, with great success for the company, that it had equity stake in its Dutch subsidies. The courts deemed the payments made to the company, which is based in New York, were nontaxable returns on capital investment.

The IRS faced a suit from PepsiCo in 2009 after it attempted to collect taxes owed from the tax periods of 1998 to 2002. According to the IRS, the company’s Dutch payments to a parent company were not equity but debt, which makes it taxable corporate income.

Although the IRS refused to comment on the situation, PepsiCo’s spokesperson remarked that the company was pleased with the Tax Court’s decision.

 

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