Coca Cola Faces $42m Tax Bill in Israel

Atlanta-based Coca Cola Corporation has retained an Israeli law firm to fight a 150 million shekel ($42 million) tax assessment by the Israel Tax Authority on royalties it earns for the use of its name by the local bottler.

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The tax authority contends that the royalties paid by Central Bottling Corporation, the Israeli Coca Cola bottler, are effectively income earned by the U.S. company in Israel. Central Bottling, which is controlled by the family of the late Muzi Wertheim, declined to comment on the report and referred al questions to Coca Cola Corporation.

Central Bottling, which has annual sales of some 2 billion shekels, making it one of Israel’s biggest food and beverage companies, is believed to pay Coca Cola Corporation tens of millions of dollars in royalties every year, but the assessment is believed to one cover a few years – not going back to 1968 when the soft drinks were first produced in Israel.

Under Israel’s tax treat with the United States, both countries are permitted to tax royalties from income generated in the other’s territory. The rate ranges from 10% for a copyright or film to 15% for manufactured goods. Normally the tax would have been deducted at source since Coca Cola Corporation doesn’t have a corporate presence in Israel.

Industrial royalties are defined as payment for the use or right to use patents, designs, models, plans, formulas or secret processes, trademarks and so forth. Therefore, it can be assumed that the Tax Authority is seeking a 15% tax rate.

Simon Yaniv, an attorney with the Tel Aviv firm Barone & Company, told the Calcalist daily that royalties for use of the Coca Cola logo would typically be taxed at 10% while use of Coke’s famous secret formulation would be taxed at 15%. That, he said, could be a source of dispute between the two sides.