Central Bottling Co. is the only distributor of Coca-Cola products in Israel. (Coca-Cola Israel) has taken a big hit and will have to pay hundreds of millions of shekels to the Israeli Tax Authority. The Tel Aviv District Court dismissed the company’s appeals against tax assessments issued by the Tax Authority regarding Central Bottle Company’s tax liability for royalties paid by Coca-Cola for the worldwide use of its intellectual property rights.
These were payments made to the global Coca-Cola company within the framework of exclusive marketing agreements between the companies from 2010 to 2017. The decision was handed down on August 29, but has been barred from publication until now due to a gag order issued at the request of Coca-Cola Israel.
The publication of the main points of the decision was made after “Globus” submitted a petition to the district court for permission to publish the main points of the decision. Central Bottling Company did not object to Globes’ request and the Revenue Department said that as long as Central Bottling Company did not object to Globes’ request, neither would the Tax Authority. At this stage, the jamming order remains in full resolution.
Tax assessment appeals are normally and legally closed behind closed doors, but the judge has discretion whether to publish the decision in whole or in part, taking into account the trade secrets the applicant owns and the decision. “Globus” Adv. Orian Eshkoli Yahalom.
Central Bottling Co. The agreements between Coca-Cola and Coca-Cola do not mention royalty payments, although Coca-Cola gives the Israeli company the right to use its trademarks and intellectual property. However, the court accepted the Tax Authority’s view that part of the payments should be classified as consideration for the license to use Coca-Cola’s trademarks and intellectual property in the marketing of Coca-Cola beverages in Israel. “It is customary to pay royalties for such a strong trademark with an established global reputation,” it said.
The Tax Authority’s victory means that Coca-Cola Israel will be charged hundreds of millions of shekels in taxes for the period 2010-2017, and tens of millions of shekels more in future taxes each year. Central Bottling Co. He will appeal to the Supreme Court, so the debate is not over yet.
Tax authority: The company has developed a “method” to reduce corporate tax
The dispute between the Tax Authority and Coca-Cola Israel was first revealed by the Globes in 2017, when it was revealed that the Tax Authority demanded $150 million in taxes for 2010-2011. In an assessment against the company, the Tax Office alleged that Coca-Cola Israel had developed a “method” to evade tax on payments it made to an international company in the United States for “royalties”.
After years of discussions with the tax authority, the dispute reached the district court, when Central Bottling Co. He filed an appeal against the tax assessments for the years 2010-2017. Judge Magen Altuvia heard the complaints.
The dispute revolved around the obligation of classification and withholding tax for payments by Coca-Cola Israel under exclusive packaging and marketing agreements with the international Coca-Cola company. The assessee classified part of the payments as royalties for the use of intellectual property rights of Coca-Cola, which required deduction of tax at source. According to the tax authority, the royalties were transferred by the Israeli company to the US company’s authorized factory in Ireland without any apparent authority or justification.
Since 1968, Central Bottling Co. Through agreements with Coca-Cola, it retains the right to distribute soft drinks sold under the Coca-Cola trademark in Israel. Central Bottling Co. to market and sell the beverages in Israel. procures extracts from an authorized Coca-Cola supplier, prepares beverages by adding ingredients, bottles and transports to marketing and sales outlets.
Assessments by the tax authority have revealed creative tax planning that Coca-Cola has engaged in for decades, according to the agency.
Under the agreements, the Israeli company receives extracts from Atlantic Industries, an Irish-based company, although Central Bottling Co. has no agreement with the Irish company. The invoices sent from Ireland to the Israeli company show that it is a company in the Cayman Islands.
The tax authority claimed that as part of the assessment procedure, in practice, all contracts of Central Bottling Co., including oral and written agreements, reports, audits, current contracts with Coca-Cola Co. guidelines and financial accounting.
The assessee also found that the payment classified as royalty constituted income from a royalty paid by a company resident in Israel and was accordingly produced in Israel and taxed in Israel by deducting tax at source (from payments classified as royalties to an Irish branch).
Central Bottling Co.” There is no factual basis for the change in the position of the taxing authority
Central Bottling Co. Coca-Cola appealed these decisions, claiming that it was buying a ready-made product that touched on Coca-Cola’s reputation, and that in this case, the law stated that the marketer should not be required to pay royalties.
He further claimed that the preparation and packaging of the drinks using extracts from an authorized Coca-Cola supplier was carried out according to the guidelines of the international company to ensure that the drinks distributed in Israel would only be produced by Coca-Cola. according to the standards and quality of the global company, “So it will be the same in quality and taste as the products of the Coca-Cola Group around the world.”
According to Central Bottling Co., this method of operation is common in many countries because supplying the extract reduces the weight of water and sugar available for each bottle in their countries, thus significantly reducing transportation costs for Coca-Cola beverages.
It was further argued that if he bought the product “packaged and ready for sale”, the transport costs would be so high that it would be financially unprofitable to sell Coca-Cola drinks.
Central Bottling Co. added that this commercial operating model has been operated by Coca-Cola for more than 120 years through 300 bottlers in 200 countries and is adopted by most companies operating in the soft drinks market. It is therefore argued that this is not an operating model driven by considerations of tax avoidance or minimization, but rather a commercial operating model that has existed for decades.
The company also claimed that over the years the Tax authority had conducted assessment audits and deductions, the royalty issue had been investigated and all these years the assessee had taken the stand that it had not paid royalty and had unequivocally stated that part of the payment for the extracts was due to Coca-Cola’s intellectual property. did not consider royalties for the use of his property.
It was only in 2014 that the tax inspectorate decided to change its long standing status and charge tax at source for payment of conceptual royalties. It is alleged that the transfer is arbitrary, has no factual basis and violates the principle of certainty and the authority of the company.
The judge ruled: an economic asset with significant power
Judge Magen Altuvia rejected Central Bottling Co.’s arguments that it bought a “finished product” from Coca-Cola, saying: “Even if I find in favor of the petitioner and Coca-Cola, Coca-Cola’s way of doing business is that Cola, According to manufacturers and distributors in various countries, including Israel, Coca-Cola aims to reduce the need to transport large quantities of sugar and water to save on production costs – this is not the case. Change the perception that the production of final beverages and additional ingredients from Coca-Cola requires a large number of machines and workers.
In the circumstances, the judge ruled that Central Bottling Co. produces the drinks from ingredients provided by Coca-Cola and according to its instructions. Considering that the company manufactures beverages in Israel rather than purchasing finished products, it can be concluded that marketing beverages using Coca-Cola’s reputation and trademarks is an economic asset with significant power and requires payment. royalties for use. “It is customary and accepted when a brand owner licenses a manufacturer and marketer to use its trademarks and reputation for the marketing and sale of the manufacturer’s product,” Judge Altubia said.
The judge also noted that given Coca-Cola’s power relations and strength in the soft drinks market, at least in Israel, it is likely that Coca-Cola had the upper hand in crafting the deal between it and the parent company, and was aware of it in the process. in the marketing of beverages, the marketer relied on his reputation and therefore could expect the payments to him to be treated as part royalties.
The judge also rejected Coca-Cola’s argument that it relied on the Israel Tax Authority’s decades-old position that royalties should not be taxed.
Answer
Central Bottling Co, “The decision accepts the position of the Tax Authority regarding the tax liability in Israel of international companies recognized in Israel through local companies selling their products in Israel under international brands. Accordingly, local companies are required to deduct this tax at source. Note that this This is the first decision in this dispute between the tax authority and international companies, and it will be taken to the Supreme Court for a decision.”
Globes, Israel business news – en.globes.co.il – published on September 12, 2024.
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