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155 T.C. No. 10

UNITED STATES TAX COURT

THE COCA-COLA COMPANY & SUBSIDIARIES, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 31183-15.

Filed November 18, 2020.

P, a U.S. corporation, was the legal owner of the intellectual

property (IP) necessary to manufacture, distribute, and sell some of

the best-known beverage brands in the world. This IP included trademarks, product names, logos, patents, secret formulas, and proprietary

manufacturing processes. P licensed foreign manufacturing affiliates,

called "supply points," to use this IP to produce concentrate that they

sold to unrelated bottlers, who produced finished beverages for sale

to distributors and retailers throughout the world. P's contracts with

its supply points gave them limited rights to use the IP in performing

their manufacturing and distribution functions but gave the supply

points no ownership interest in that IP.

During 2007-2009 the supply points compensated P for use of

its IP under a formulary apportionment method to which P and R had

agreed in 1996 when settling P's tax liabilities for 1987-1995. Under

that method the supply points were permitted to satisfy their royalty

obligations by paying actual royalties or by remitting dividends. During 2007-2009 the supply points remitted to P dividends of about $1.8

billion in satisfaction of their royalty obligations. The 1996 agree-

SERVED Nov 18 2020

-2ment did not address the transfer pricing methodology to be used for

years after 1995.

Upon examination of P's 2007-2009 returns R determined that

P's methodology did not reflect arm's-length norms because it overcompensated the supply points and undercompensated P for the use of

its IP. R reallocated income between P and the supply points employing a comparable profits method (CPM) that used P's unrelated bottiers as comparable parties. See sec. 1.482-5, Income Tax Regs.

These adjustments increased P's aggregate taxable income for 2007-

2009 by more than $9 billion.

1. Held: R did not abuse his discretion under I.R.C. sec. 482

by reallocating income to P by employing a CPM that used the supply

points as the tested parties and the bottlers as the uncontrolled comparables.

2. Held, further, R did not err by recomputing P's I.R.C. sec.

987 losses after the CPM changed the income allocable to P's Mexican supply point, a branch of P.

3. Hel_d, further, P made a timely election to employ dividend

offset treatment with respect to dividends paid by the supply points

during 2007-2009 in satisfaction of their royalty obligations. R's

reallocations to P must accordingly be reduced by the amounts of

those dividends.

John B. Magee, Kevin L. Kenworthy, Sanford W. Stark, Saul Mezei, Steven

R. Dixon, Carl Terrell Ussing, Lisandra Ortiz, Lamia R. Matta, Michael D.

Kummer, Hans D. Gerling-Ritters, and John F. Craig III, for petitioner.

-3Jill A. Frisch, Anne O'Brien Hintermeister, Julie Ann P. Gasper, Heather L.

Lampert, Curt M. Rubin, Lisa M. Goldberg, and Huong T. Bailie, for respondent.

CONTENTS

FINDINGSOFFACT.............................................. 12

II.

International Structure ... . . . . . ... . . . . . .... . . . . ... . . . . . .... . . . . . 12

SupplyPoints...........................................13

Service Companies.......................................15

Bottlers................................................16

TheCoca-ColaSystem................................ .........18

IntegratedManagement...................................18

Functions Performed ... . . . . .... . . . . .... . . . . .... . . . . .... . .20

III.

Manufacturing.....................................20

R&D....................................... 21

Quality Assurance............................. 22

Concentrate Production . . . . . . . . . . . . . . . . . . . . . . . . .24

Beverage Production and Bottling. . . . . . . . . . . . . . . . . 25

Supply Chain Management . . . . . . . . . . . . . . . . . . . . . .26

Marketing/Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Consumer Marketing........................... 31

Trade Marketing and Distribution . . . . . . . . . . . . . . . . 37

Contractual Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Supply Point Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Rights and Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Production and Sale of Concentrate . . . . . . . . . . . . . . . 43

Trademarks.................................. 44

Term Length and Exclusivity . . . . . . . . . . . . . . . . . . . . . . . . . 46

Remuneration..................................... 47

Service Company Agreements .. . . . . .... . . . . .... . . . . .... . . . 49

Standard Terms.................................... 49

-4-

IV.

OtherProvisions....................................52

Invoicing......................................... 54

BottlerAgreements.......................................57

Rights and Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Production and Sale of Finished Beverages . . . . . . . . . 57

Trademarks.................................. 59

Term Length and Exclusivity . . . . . . . . . . . . . . . . . . . . . . . . . 59

Remuneration......................................61

AssetsandIncome............................................66

Assets.................................................68

HQ..............................................68

SupplyPoints......................................69

IncomeandExpenses.....................................70

HQ..............................................71

SupplyPoints......................................72

Brazilian Trademarks.....................................76

Tax Reporting and IRS Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .78

OPINION........................................................ 85

Burden ofProof.............................................. 85

II.

StandardofReview............................................86

III.

Threshold Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

IV.

The 1996 Closing Agreement.............................. 93

Relevant Parties and Transactions.......................... 98

The"Best Method Rule" .................................102

Respondent's Bottler CPM .. . . . . .... . . . . .... . . . . .... . . . . .... . . .109

Reasonableness of CPM Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . 115

Selection of Bottlers as Comparable Parties. . . . . . . . . . . . . . . . . . .120

Data, Assumptions, and Comparability Adjustments . . . . . . . . . . . 133

SelectionofBottlers............................... 134

Computational Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . 137

-5-

OperatingAssets.............................137

OperatingProfit..............................140

Implementation of CPM/ROA . . . . . . . . . . . . . . . . . . . . . . . .143

"SplitInvoicing".............................................147

VI.

Petitioner's Arguments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .150

Supposed "Marketing Intangibles" . . . . . . . . . . . . . . . . . . . . . . . . . 150

LegalOwnership...................................154

Economic Substance................................159

Setting Aside Contract Terms .. . . . . . . . . . . . . . . . . . 160

Consistency With Economic Substance . . . . . . . . . . . 167

Supposed "Long-Term Licenses". . . . . . . . . . . . . . . . . . . . . . . . . . . 172

Royalties Payable by Brazilian Supply Point . . . . . . . . . . . . . . . . . 175

Ownership of Brazilian Trademarks . . . . . . . . . . . . . . . . . . . 175

Brazilian "Blocked Income". . . . . . . . . . . . . . . . . . . . . . . . . .184

Bottlers' Ownership of Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . 1 86

Proposed Alternative Transfer Pricing Methodologies . . . . . . . . . . 191

Proposed CUT Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191

Proposed "Residual Profit Split Method" . . . . . . . . . . . . . . 197

Proposed "Unspecified Method" . . . . . . . . . . . . . . . . . . . . . .206

VII. Collateral Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208

Recomputation of Section 987 Loss . . . . . . . . . . . . . . . . . . . . . . . . 209

DividendOffset........................................218

APPENDIX......................................................230

LAUBER, Judge: The Coca-Cola Co. (TCCC) is the ultimate parent of a

group of entities (Company) that do business in more than 200 countries throughout the world. TCCC and its domestic subsidiaries (petitioner) joined in filing

consolidated Federal income tax returns for 2007, 2008, and 2009. Upon exami-

-6nation of those returns, the Internal Revenue Service (IRS or respondent) made

adjustments that increased petitioner's aggregate taxable income by more than

$9 billion, resulting in tax deficiencies as follows:

Year

Deficiency

2007

2008

2009

$1,114,116,873

1,069,425,951

1,121,220,625

By amendment to answer, respondent determined additional deficiencies attributable to the use of "split invoicing" by certain of petitioner's foreign affiliates. M

infra pp. 64-66. The additional deficiencies are as follows:

Year

Increase in

deficiency

2007

2008

2009

$28,124,719

43,314,595

63,465,860

These deficiencies result from transfer pricing adjustments under section

482 by which the IRS reallocated substantial amounts of income to petitioner,

chiefly from its foreign manufacturing affiliates.¹ These affiliates had plants in

¹Unlessotherwise indicated, all statutory references are to the Internal Revenue Code (Code) in effect at the relevant times, and all Rule references are to the

Tax Court Rules of Practice and Procedure. We round most monetary amounts to

the nearest dollar. Dollar amounts appearing in tables occasionally do not sum

exactly because of rounding.

-7Brazil, Chile, Costa Rica, Egypt, Ireland, Mexico, and Swaziland.2 The plants

produced "concentrate"--syrups, flavorings, powder, and other ingredients--used

in the production of petitioner's branded soft drinks (including Coca-Cola, Fanta,

and Sprite) and other nonalcoholic, ready-to-drink beverages.

These affiliates sold and distributed concentrate to hundreds of Coca-Cola

bottlers in Europe, Africa, Asia, Latin America, and Australasia. The bottlers,

most of which were independent of petitioner, ranged from small family-owned

businesses to large multinational companies. The bottlers used this concentrate to

produce finished beverages that they marketed (directly or through distributors) to

millions of retail establishments throughout the world (excluding the United States

and Canada). Because the foreign manufacturing affiliates supplied concentrate to

bottlers, these affiliates are often called "supply points," and we will generally

refer to them as such.

To enable the supply points to manufacture and sell concentrate, petitioner

licensed them to use petitioner's intangible property, including trademarks, brand

names, logos, patents, secret formulas, and proprietary manufacturing processes.

This intangible property is extremely valuable: Coca-Cola is the best known

2Swaziland has since changed its name to the Kingdom of Eswatini. We

refer to it as Swaziland in this Opinion to match the parties' terminology.

-8brand in the world, recognized by more of the planet's 7.7 billion inhabitants than

any other English word but "OK." The gist of respondent's position is that the

supply points paid insufficient compensation to petitioner for the rights to use

petitioner's intangible property. The Irish and Brazilian supply points account for

roughly 85% of the disputed income adjustments.3

For 2007-2009 petitioner reported income from its foreign supply points using the "10-50-50 method," as it had done for the previous 11 years. This was a

formulary apportionment method to which petitioner and the IRS had agreed in a

closing agreement executed in 1996, which resolved petitioner's tax liabilities for

1987-1995. This method permitted the supply points to retain profit equal to 10%

3All of the supply points except the Mexican supply point were controlled

foreign corporations (CFCs). See sec. 957(a). The Mexican supply point operated

as a branch, and its income was reported on petitioner's U.S. consolidated return.

As applied to the Mexican supply point, therefore, the transfer pricing adjustment

did not increase petitioner's gross income. Rather, the IRS sought to reduce petitioner's foreign tax credits on the theory that the Mexican branch had reported insufficient royalty expenses for use of petitioner's intangible property, thus artificially inflating the branch's income and the Mexican corporate tax paid thereon.

Respondent contended that the Mexican taxes were to that extent noncompulsory

payments ineligible for the foreign tax credit. See sec. 901; sec. 1.901-2(a)(2)(i),

Income Tax Regs. We resolved that issue in petitioner's favor on summary judgment. See Coca-Cola Co. & Subs. v. Commissioner, 149 T.C. 446 (2017). The

tax liabilities attributable to the Mexican supply point for 2007-2009 have thus

been resolved, with the exception of a foreign currency adjustment under section

987. See infra pp. 209-218. But the operations of the Mexican supply point are

relevant to the overall transfer pricing analysis and were the subject of extensive

testimony at trial.

-9of their gross sales, with the remaining profit being split 50%-50% with petitioner.

The closing agreement did not address what transfer pricing methodology would

be used for years after 1995. But petitioner continued to employ the 10-50-50

method, from 1996 onwards, to report income from its foreign supply points unless an advance pricing agreement or competent authority proceeding dictated

otherwise.

Because the closing agreement specified the compensation due petitioner

for use of its intangible property, the amounts due petitioner under the 10-50-50

method were in the nature of royalties. However, the closing agreement permitted

the foreign supply points to satisfy their royalty obligations by paying actual royalties or by repatriating funds to petitioner in other ways, e.g., by paying dividends.

During 2007-2009 more than $1.8 billion of the income petitioner received from

its foreign supply points pursuant to the 10-50-50 method took the form of dividends rather than royalties. Petitioner claimed "deemed paid" foreign tax credits

(FTCs) under section 902 with respect to these dividends, as the closing agreement

had permitted for 1987-1995.

Upon examination of petitioner's 2007-2009 returns the IRS concluded that

the 10-50-50 method did not reflect arm's-length pricing because it overcompensated the supply points and undercompensated petitioner for the use of its intan-

- 10 gible property. Invoking section 482, the IRS reallocated income to petitioner using a comparable profits method (CPM), treating independent Coca-Cola bottlers

as comparable parties. The IRS regarded these bottlers as comparable to the supply points because they operated in the same industry, faced similar economic

risks, had similar contractual relationships with petitioner, employed many of the

same intangible assets (petitioner's brand names, trademarks, and logos), and ultimately shared the same income stream from sales of petitioner's beverages.

To implement its bottler CPM, the IRS determined the average return on

operating assets (ROA) for a group of independent Coca-Cola bottlers that it

deemed comparable. It applied that average ROA to the operating assets of each

supply point, generating a deemed arm's-length operating profit. The IRS then

reallocated to petitioner all income received by each supply point in excess of that

benchmark. This methodology produced very substantial reallocations from the

Irish and Brazilian supply points and somewhat smaller reallocations from the

Costa Rican, Chilean, and Swazi supply points. The IRS methodology generated a

reverse allocation of income from petitioner to the Egyptian supply point, which

for historical reasons had endured many years of economic underperformance.

Petitioner challenges respondent's section 482 reallocations as arbitrary and

capricious. It contends that the IRS acted arbitrarily by abandoning the 10-50-50

- 11 method, having acquiesced in the use of that method during five prior audit cycles

spanning a decade. In any event, petitioner argues that the IRS erred in employing

the bottler CPM to reallocate income.

Petitioner contends that independent Coca-Cola bottlers are not comparable

to the supply points because the latter own immensely valuable intangible assets

that do not appear on their balance sheets or in any written contract. These assets,

which petitioner calls "marketing intangibles" or "IP associated with trademarks,"

allegedly were created when the supply points financed consumer advertising in

foreign markets. Petitioner urges that the bottlers by comparison are "marketinglight" businesses that operate at a different level of the market.

Petitioner urges that the supply points owned (in substance if not in form)

local rights to petitioner's valuable brands and should thus enjoy supranormal

returns as "master franchisees" or long-term licensees. To implement that theory

petitioner offers, as alternatives to respondent's bottler CPM, a comparable

uncontrolled transaction (CUT) model and a residual profit split method (RPSM)

as the best methods for determining the supply points' true economic income.

Alternatively, if a bottler ROA is applied to the supply points, petitioner contends

that each supply point's asset base should be increased to reflect the value of its

supposed "marketing intangibles."

- 12 If we sustain respondent's position in whole or part, petitioner urges that the

transfer pricing adjustments should be reduced to reflect dividends paid by the

supply points, to the extent those amounts were repatriated to satisfy the supply

points' royalty obligations. Although petitioner elected "dividend offset" treatment on timely filed returns for 2007-2009, it did not include in those returns ex-

planatory statements as directed by Rev. Proc. 99-32, 1999-2 C.B. 296. Respondent contends that petitioner's failure to include these statements is fatal to its

claim to dividend offsets. Petitioner urges that it substantially complied with the

revenue procedure's requirements and that substantial compliance was sufficient.4

FINDINGS OF FACT

International Structure

In 1886 TCCC produced the first Coca-Cola beverage, which it sold initially at soda fountains. In 1899 it transferred to third parties, for $1, the exclusive

rights to bottle and distribute finished Coca-Cola beverages throughout the United

States. This created the "Coca-Cola System," comprising the Company and its

4Petitioner concedes that allowing dividend offsets would cause the dividends to lose their character as such, necessitating forfeiture of the deemed-paid

FTCs petitioner had claimed with respect to those dividends. Respondent has

amended his answer to allege that FTCs of $40,717,804 for 2007, $65,941,179 for

2008, and $49,977,463 for 2009 should be disallowed in the event we permit petitioner to offset, against a reallocation of royalty income, the dividends paid by the

supply points in satisfaction of their royalty obligation.

- 13 (largely independent) bottlers. At all relevant times petitioner has had its headquarters (HQ) and principal place of business in Atlanta, Georgia.

Petitioner expanded internationally in the early 1900s, arriving in Europe

and Latin America during the 1920s. As a vehicle for this growth petitioner established in 1930 the Coca-Cola Export Corp. (Export), a wholly-owned domestic

subsidiary of TCCC. Export expanded aggressively, creating branches in 27 foreign countries by 1975. By 2008, 74% of the Company's sales were made outside

the United States.

Supply Points

Petitioner engaged in significant restructuring as its international market

matured. During World War II it had built numerous plants in Europe and Asia to

supply Coca-Cola to U.S. soldiers. After the war petitioner sold the bottling

facilities to private-sector companies. As bottlers were divested to third parties,

Export began contributing its concentrate plants and other branch assets to foreign

subsidiaries. Export's contributions to these subsidiaries generally consisted of

tangible operating assets, associated goodwill, and similar items. The subsidiaries

acquired via these transactions no meaningful intangible property in the form of

trademarks, tradenames, copyrights, franchises, licenses, or bottler agreements.

- 14 Export initially established affiliates in virtually every country to manufacture and supply concentrate to local bottlers. Before 1988, for example, Export

had a fully integrated concentrate plant in every Western European country. Over

time the Company gradually consolidated its concentrate manufacturing into larger

plants that supplied concentrate to bottlers in diverse national markets. The Irish

supply point, which reported average annual gross revenues of $6.89 billion during 2007-2009, ultimately sold concentrate to bottlers in more than 90 countries,

some as distant as New Zealand and Papua New Guinea.

Export owned (directly or indirectly) the seven supply points involved here.

The Mexican supply point was a branch of Export and its income was reported on

petitioner's U.S. consolidated return. The Brazilian supply points and the Chilean

supply point6 were CFCs wholly-owned by Export. The Costa Rican, Egyptian,

5The Brazilian supply point, Coca-Cola Indústrias Ltda. (CCIL), was the

parent of Recofarma Indústria do Amazonas Ltda. (Recofarma), which operated

the Brazilian manufacturing facilities. In August 2009 Recofarma acquired CocaCola Concentrados e Refrigerantes Ltda. (CCRL), which it thereafter operated as a

flavoring plant. For U.S. tax purposes Recofarma and CCRL elected to be treated

as disregarded entities of CCIL, and we will refer to CCIL and its subsidiaries collectively as the Brazilian supply point.

6 The Chilean supply point, Coca-Cola de Chile, S.A., formed Nuevas Bebidas de Colombia Ltda. as a wholly owned subsidiary in March 2009, and the latter elected for U.S. tax purposes to be treated as a disregarded entity. We will refer to these entities collectively as the Chilean supply point.

- 15 Irish, and Swazi supply points were branches or disregarded subsidiaries of Atlantic Industries (Atlantic), a Cayman Islands CFC wholly-owned by Export.

Service Companies

As concentrate manufacturing became consolidated into fewer and fewer

supply-point affiliates, the Company's other foreign activities were typically taken

over by local service companies (ServCos). During 2007-2009 the Company appears to have had at least 60 foreign ServCos, each serving one or more national

markets. The ServCos were responsible for local advertising and in-country consumer marketing, which they carried out with assistance from third-party media

companies and creative design firms. The ServCos were also responsible for liaison with local bottlers, a function petitioner called "franchise leadership." A few

ServCos had research and development (R&D) centers, which served multiple

national markets.

The supply points had little or no direct ownership interest in the ServCos

that served these national markets. Most of the ServCos were owned by Export,

generally through a chain of subsidiary CFCs. Atlantic owned two ServCos (both

Irish entities) and 48% of the Mexican ServCo. TCCC itself owned (directly or

indirectly) CFCs that operated ServCos in Panama, Costa Rica, and Peru.

-16C.

Bottlers

The vast bulk of the Company's beverages were (and are) produced and

distributed by independent Coca-Cola bottlers. At the outset many bottlers were

small, often family-owned, enterprises that distributed to retailers within a narrow

geographic market. But bottlers were likewise transformed by consolidation, and

many became large multinational companies.

During 2007-2009 the Company had about 300 independent bottlers that

served (directly or indirectly) about 20 million retailers. The three largest independent bottlers were Coca-Cola Enterprises (CCE), Coca-Cola FEMSA, and

Coca-Cola Hellenic (Hellenic). CCE, which operated in Western Europe and

North America, sold about 42 billion units of Coca-Cola beverages annually.

Coca-Cola FEMSA served more than 1.5 million retailers throughout Latin

America.7 Hellenic served 28 national markets in Western and Central Europe, the

Balkans, Russia, and Ukraine.

The bottlers produced numerous nonalcoholic ready-to-drink (NARTD)

beverages, generally (but not exclusively) under petitioner's brands. These included the Company's iconic carbonated soft drinks (CSDs): original Coca-Cola

7TCCC held minority equity interests in Coca-Cola FEMSA and certain other bottlers. In no case did these stock holdings permit petitioner to control those

bottlers' activities or dictate their decisions.

- 17 (Coke Red), Fanta, Sprite, and variations and extensions of these brands (such as

Diet Coke and Coke Zero). In more recent years, as the Company expanded its

beverage portfolio, the bottlers produced an increasing array of noncarbonated

drinks (non-CSDs), including juices, teas, bottled waters, energy drinks, and

coffee-flavored beverages.

The bottlers produced most of these beverages using concentrate manufactured by the supply points. As appropriate to the particular drink, the bottlers mixed the concentrate with purified water, carbon dioxide, sweeteners, and/or flavorings; injected the finished beverages into bottles and cans of various serving sizes;

packaged and warehoused these items pending distribution; and delivered the beverages to retail establishments that included supermarkets, small retail stores, bars,

and restaurants. In certain European markets bottlers relied on intermediate distributors to deliver the beverages to those retail customers.

Although independent bottlers were crucial for the Coca-Cola System, petitioner occasionally acquired bottlers and brought them temporarily "in house."

This occurred (for example) when a bottler encountered financial difficulty or had

to be divested in a merger. In 2006 TCCC grouped these controlled bottlers into a

single management unit--the Bottling Investments Group (BIG), colloquially

known as the "bottler hospital"--and supervised their activities directly from

- 18 Atlanta. Generally, petitioner's objective was to divest ownership of these controlled bottlers as soon as they had recovered their footing operationally and financially. At any point in time, however, controlled bottlers could account for 10% or

more of the Company's unit volume in foreign markets.

II.

The Coca-Cola System

The Company and its authorized bottlers coordinated their functions in or-

der to manufacture, market, and distribute--every day of the year--about 1.6 billion

servings of NARTD beverages. This daily coordination created a shared identity

and synergistic relationship between the Company and its bottlers. Each regarded

itself as an integrated component of the Coca-Cola System.

Integrated Management

The Company used a flexible management structure that permitted local adaptation and encouraged close coordination with bottlers. By 2007 the Company

had adopted a governance model called "Freedom within a Framework." Through

its HQ function in Atlanta, TCCC set detailed guidelines for brand identity, visual

identity of products, quality assurance, business goals, and marketing strategies.

But it permitted local units to adapt these rules (within limits) to the cultural,

religious, linguistic, and culinary traditions of their particular foreign markets.

- 19 During 2007 TCCC delegated authority to regional operating groups (OGs)

for the following territories: North America, Latin America, the European Union

(EU), Eurasia, Africa, and the Pacific. (Eurasia and Africa were merged in 2008.)

Each geographical OG supervised multiple business units (BUs), formerly called

divisions, which typically had responsibility for one or more national markets, depending on their size. The OGs and BUs were not legal entities. Rather, they

identified lines of managerial reporting from smaller to larger geographical territories and ultimately to HQ in Atlanta.

Almost all Company personnel involved in the manufacture of concentrate

worked for the supply points.8 The Irish, Mexican, Costa Rican, and Swazi supply

points had virtually no workers other than those engaged in producing concentrate

and their support staff. Most other personnel, including those holding leadership

positions in the OGs and BUs, were employed by the ServCos. During the years

at issue, the ServCos employed all of the OG leadership and about 90% of the 200

officers who made up the BU leadership.

The ServCo leadership teams acted as the liaison between the Company and

local bottlers. These teams acted in a day-to-day advisory role to bottlers, facilitat8Personnel who worked for the Mexican supply point were nominally on the

payroll of the Mexican ServCo. This was apparently done to solve a Mexican

labor-law problem.

- 20 ing bottlers' access to the Company's statistical data, consumer insights, advertising plans, and marketing strategies. They shared with bottlers the responsibility

for creating coordinated annual business plans that fulfilled TCCC's global strategy and the needs of the local market.

These annual business plans reflected detailed discussions with bottlers concerning beverage pricing, packaging, marketing, and distribution channels. The

ServCos and the bottlers relied on Company data and guidelines for the granularlevel details of these plans. But the budgets and overall strategies were reviewed

and approved by TCCC and the top leadership of each bottler.

Functions Performed

The Coca-Cola System required that its participants discharge two principal

functions: manufacturing and marketing/distribution. The Company and the bot-

tiers jointly discharged these functions, performing complementary tasks in a synergistic way.

Manufacturing

The Coca-Cola System relied on an integrated manufacturing supply chain

that employed personnel from all of the entities discussed above. TCCC, assisted

by the ServCos, took principal responsibility for R&D and quality assurance. Actual production was split between the supply points and the bottlers: The supply

- 21 points manufactured concentrate, and the bottlers used the concentrate to produce

Coca-Cola beverages. TCCC was chiefly responsible for supply chain management regarding concentrate, and the bottlers were responsible for supply chain

management regarding finished products.

R&D

Much of the system's value rested on familiar, consistently flavored drinks

delivered by well-established production processes. Perhaps for that reason, the

Company's R&D budget was smaller (as a percentage of revenues) than the R&D

budgets of some of its competitors. But the Company maintained an active R&D

program to explore new beverages, ingredients, sweeteners, and packaging. The

annual budget for this program during 2007-2009 averaged about $200 million,

roughly 1% of the Company's worldwide revenues.

The Company divided its R&D projects into two major subsets: research

projects and development projects. Most research projects were undertaken by

TCCC's central R&D laboratory in Atlanta. These projects consisted of new, unproven methods that, if successful, could be implemented across many countries

and product lines. Examples included research into new sugar substitutes and

environmentally friendly packaging materials.

- 22 Development projects usually focused on customizing global products and

concepts for local implementation, taking account of local regulations, taste preferences, and other variables. These projects were undertaken primarily by the

Company's six regional R&D centers. Two of these were in the United States. As

far as the record reveals, the other four--located in Belgium, Brazil, China, and

Japan--were operated by ServCos.

TCCC and the ServCos were responsible for virtually all of the Company's

R&D. TCCC owned and staffed the three domestic R&D centers and employed

roughly 60% of the Company's researchers. ServCos employed all other R&D

personnel except for 20 employees who worked for the Brazilian supply point.

The other supply points had no R&D personnel on their staffs.

Quality Assurance

TCCC personnel discharged most of the Company's quality control functions. The Ingredient Quality Department, part of the HQ function in Atlanta,

worked with the regional R&D centers to ensure consistent production quality by

codifying recipes, creating global ingredient standards, and approving third-party

suppliers of raw materials. Because TCCC was ultimately responsible for all

formulations of Coca-Cola products, any reformulations of these beverages (e.g.,

to use new sweeteners) had to be approved by HQ. TCCC published quality assur-

- 23 ance information on a central database (Optiva in 2007 and Picasso in 2008 and

2009) that supply points and bottlers could easily access.

TCCC personnel, with assistance from outside professionals, performed regular quality control audits of supply points, flavoring plants, and other manufacturing facilities, including plants owned by bottlers. TCCC audited supply point facilities every two or three years. Although the bottlers relied on the Company for

quality assurance with respect to concentrate, they were responsible for quality

assurance with respect to their own production processes. Bottlers engaged in

extensive testing of finished products in their own on-site laboratories.

The supply points, using their production personnel, engaged in day-to-day

quality control, e.g., by performing in-process and product release testing. They

performed this testing by following the Coca-Cola Management System, which

provided an outline of the Company's quality control expectations. None of the

supply points (apart from the Brazilian supply point) had any employees specifically dedicated to quality assurance.9

°During 2007-2009 the Brazilian supply point employed (on average) about

50 workers identified by petitioner as primarily engaged in quality assurance.

- 24 c.

Concentrate Production

The supply points manufactured concentrate. Their manufacturing activity

consisted of procuring raw materials and using TCCC's guidelines and production

technologies to mix and convert raw materials into concentrate. Their procurement activities were limited: Many ingredients could be obtained only through

Company-owned flavor plants, and other ingredient purchases were negotiated by

bulk procurement specialists employed by TCCC or the ServCos. Only three supply point employees (one in Chile and two in Brazil) were specifically dedicated to

procurement. After completing the manufacturing process, the supply points

packaged the concentrate into kits tailored to the needs and capacities of the bottiers to whom they distributed.

The manufacturing process entailed various forms of extraction, filtration,

mixing, blending, aging, and precision filing. In performing these activities the

supply points employed TCCC's secret formulas, confidential ingredients, and

proprietary mixing specifications. All of these steps were governed by a detailed

manufacturing protocol dictated by TCCC. Petitioner's experts agreed that this

manufacturing activity was a routine activity that could be benchmarked to the

activities of contract manufacturers. Two of petitioner's experts, Drs. Michael

- 25 Cragg and Sanjay Unni, applied an 8.5% markup on costs to determine an appropriate return for the supply points' concentrate manufacturing function.¹°

The vast majority of the people who worked at the supply points were engaged solely in concentrate production. In 2009 the Irish supply point had 599

employees, at least 588 of whom were engaged in concentrate production. The

Costa Rican supply point had 60 employees, all of whom were engaged in concentrate production. The Swazi supply point had 153 employees, 135 of whom were

engaged in concentrate production. The Brazilian, Chilean, and Egyptian supply

points performed other business activities, including marketing, sales, and finance.

To the extent supply point employees engaged in such nonproduction activities,

they generally performed functions similar to those performed by ServCo employees and overseen by BU leadership. As explained infra p. 50, ServCos were compensated for their services on a cost-plus basis.

Beverage Production and Bottling

Bottlers performed all finished product manufacturing. Having procured

concentrate from supply points, the bottlers prepared finished beverages by mixing

the concentrate with purified water, carbon dioxide (for sparkling drinks), sugar or

¹°Analphabetical listing of the parties' expert witnesses, together with a

brief résumé of each, appears in an appendix to this Opinion.

- 26 other sweeteners, and additional ingredients obtained from Company-approved

suppliers. The Company imposed strict standards for water quality, and each bottling facility was equipped with an advanced water treatment system. As a rule,

each class of beverage (CSDs, juices, and table waters) ran on a specialized, highspeed production line that typically could handle only one product in one package

size at a time. Bottlers thus needed multiple production lines to cover all beverages in all forms of packaging. Bottlers printed and appended brand labels to the

cans and bottles before distributing or warehousing the products.

Supply Chain Management

The Company and the bottlers each performed supply chain management

over their respective shares of the production and distribution cycle. The Company managed the supply chain from the sourcing of raw ingredients through the

production of concentrate to the allocation of concentrate to bottlers. Bottlers

managed the supply chain from that point forward.

TCCC performed virtually all supply chain management for the Company

during 2007-2009. Many years earlier, when concentrate production was widely

dispersed on a country-by-country basis, the Company had delegated supply chain

management to local BUs. But that form of supervision became inefficient as con-

- 27 centrate manufacturing was consolidated into fewer plants that sold to hundreds of

bottlers worldwide.

In a bid to rationalize this system and reduce production costs, the Company

in the late 1990s centralized supply chain management into the Commercial Product Supply (CPS) group. During the tax years at issue CPS was a subdivision of

BIG and (like it) was centrally managed by HQ in Atlanta. A Supply Point Committee, including CPS managers and top officials from TCCC's tax and treasury

departments, made key recommendations about concentrate supply.

CPS leadership regularly shifted and reorganized concentrate production to

enhance efficiency, reduce costs, and ensure backup sources of concentrate in the

event of a supply disruption. On the basis of recommendations from CPS, the

Company constructed new supply points or expanded existing plants, often in

countries with low tax rates and favorable tariff regimes. CPS then shifted concentrate production away from established plants to these newer (and typically

larger) facilities. CPS sometimes shifted production among supply points to reflect its assessments of risks from political unrest and natural disasters (such as

earthquakes and typhoons).

The Company, which had 52 concentrate plants in the 1980s, has pursued a

steady policy of consolidating concentrate production. Between 1986 and 2006

- 28 the Company closed (or shifted substantial production away from) 15 concentrate

plants on five continents. During 2007-2009 the Company closed three concentrate plants (in Australia, Morocco, and Peru), leaving it with only 18 foreign supply points as of2010. These closures and production shifts caused the supply

points that lost production to suffer a reduction in (or the total elimination of) their

manufacturing income. In virtually none of these instances was the losing supply

point compensated--by TCCC or by the supply point that took over its production--for this loss of economic value."

CPS leadership often shifted production to supply points located in jurisdictions that offered tax or tariff incentives. The Irish supply point, which reported

an income tax rate of 1.4% during the period at issue, built a state-of-the-art plant

at Ballina in 1999. In 2001 the Company shifted to the Irish supply point, from

the Mexican supply point, roughly 50% of the latter's production of concentrate

for Coke Red. The Irish supply point then exported that concentrate back to bottiers in the Mexican market. CPS directed numerous other shifts of production to

the Irish supply point between 1984 and the tax years at issue. During 2007-2009

"On three occasions between 1962 and 1994, when concentrate production

was shifted from supply points owned by Export, Export received some stock in

the supply point that took over its production. On no other occasion was the losing supply point compensated when its production was shifted elsewhere.

- 29 the Irish supply point had by far the largest production of any foreign concentrate

plant, supplying bottlers in more than 90 national markets.¹²

On CPS' recommendation the Company in 2008 began construction of a

new concentrate plant in Singapore. CPS caused the Irish supply point to ship to

Singapore 30 containers of second-hand equipment, including mixing tanks, drum

fillers, conveyers, racking systems, pumps, piping, and valves. The new Singapore plant was completed in two years at a cost of about $60 million.

The Company consolidated concentrate production in Singapore to gain

economies of scale, leverage free trade agreements, and take advantage of tax and

tariff incentives. To qualify for these benefits, the Singapore plant had to meet

local authorities' targets for production volume. TCCC satisfied these requirements by shifting concentrate production to Singapore from other supply points.

The Singapore supply point thereafter supplied concentrate to bottlers in 16 markets that had previously been served by 14 supply points in Asia and elsewhere.

The bottlers were responsible for supply chain management from their

receipt of concentrate through distribution of finished beverages to wholesalers

¹²Although

production shifts involving the Irish supply point show the hand

of centralized supply chain management, it is not always obvious what agenda

CPS was pursuing. For example, the Irish supply point was the primary supplier

of the French market during 1985-1990. In 1990 that market was given to a

French supply point, only to be given back to the Irish supply point in 1999.

- 30 and retailers. TCCC identified approved suppliers for most raw materials, as for

concentrate. But bottlers had responsibility for securing those materials, which

included aluminum, steel, plastic, and carbon dioxide.

Each bottler generally had a geographic territory within which it was the

exclusive supplier of Company products. This exclusivity allowed the bottlers to

cultivate an intimate understanding of the thousands of local retailers and wholesalers, anticipate their needs, and build bottling and storage capacity to match.

Marketing/Distribution

To stimulate demand for its beverages the Coca-Cola System relied in part

on consumers' past consumption experiences. But the Company and the bottlers

also conducted aggressive advertising and marketing campaigns to keep their products fresh and at the top of consumers' minds. During the tax years at issue the

System expended billions of dollars annually for marketing, split about evenly between the Company and its bottlers. TCCC and its bottlers implemented an informal "true up" strategy to ensure that marketing expenses were split roughly 50-50

between them.

In the NARTD business, where purchases are often impulse driven, two

types of marketing are needed to stimulate new demand: consumer marketing and

trade marketing. Consumer marketing, coupled with past consumption experi-

- 31 ences, creates in the minds of consumers favorable associations with the product.

Trade marketing, which includes efficient distribution and product placement in

stores, makes the product readily available to consumers, reinforces their favorable

associations with the product, and stimulates purchase at the point of sale.

Consumer Marketing

The Company took principal responsibility for consumer marketing, that is,

advertising and other messages directed toward the individuals who were the final

consumers of its products. The Company aimed to create demand by maintaining

and exploiting its brands. The Company's most important brand was Coca-Cola,

including Coke Red, Diet Coke, Coke Zero, and their lines and extensions (collectively Trademark Coke). Trademark Coke products accounted for more than 50%

of the Company's profits. The Company's core brands consisted of Trademark

Coke, Fanta, Sprite, and their lines and extensions. These core brands accounted

for about 85% of total net revenue and 86% of total profits for the seven supply

pomts at issue.

Consumer marketing began with TCCC, which created a uniform system for

all global branding. With a few exceptions (mainly in Canada) TCCC was the registered legal owner of all worldwide trademarks related to Trademark Coke, Fanta,

Sprite, and their lines and extensions. For Trademark Coke products these trade-

- 32 marks covered the "Spencerian script," the dynamic ribbon, the red-and-white color palette, and the contour bottle shape. TCCC sustained and perpetuated each

global brand by maintaining rigorous standards for its core visual design elements

and messaging. These standards provided detailed guidance that ensured a consistent look and feel for all global marketing.

TCCC maintained for each global brand a "brand vision and architecture"

that articulated what the brand aspired to stand for in consumers' minds. The

brand vision included a visual identity system (VIS), a brand strategy, core design

principles, and a detailed marketing strategy. TCCC specified requirements concerning the use of existing designs (e.g., the Coke logo and the Spencerian Script)

as well as instructions for the creation of new materials. TCCC uploaded all permissible designs and model photographs to an online database called the "Design

Machine." It provided instructions concerning appropriate advertising copy (e.g.,

how to write an ad "in the Brand Voice") and imaging (e.g., how photographs

should display condensation and ice). Major deviations from these standards

required explicit review and approval by TCCC.

Global marketing campaigns were designed by TCCC in Atlanta, with input

from ServCo personnel in various markets. A global campaign package typically

included a brand representation accompanied by suggested visual images and ad-

- 33 vertising messages. Each campaign had a "core creative idea" or "underlying conceptual structure" that expressed what the brand stood for in the marketplace.

Some global campaigns, incorporating TV ads and memorable tag lines, were

launched to "refresh" Coke Red and other global brands. These included the

"Coke Side of Life" campaign, launched in 2006, and the "Open Happiness" campaign, launched in 2009. The "Coke Side of Life" campaign ran in 200 national

markets that together represented 85% of worldwide Coke Red volume.

Other global campaigns centered on the Company's sponsorship of major

sporting events, including the Olympics and the World Cup. TCCC negotiated the

financial terms of these sponsorships and set parameters for recommended slogans, graphics, and visual images. TCCC then created a package of promotional

and advertising material that could be used on a global scale in association with

these events. One witness estimated that this toolkit gave local marketers "70% to

80% of the solution" but allowed them space to customize the campaign to their

local audience.

TCCC made these global campaign materials available to its marketing personnel around the world. The local marketers, nearly all of whom were employed

- 34 by ServCos,¹³made the initial decision (in conjunction with bottlers) whether to

"activate" a particular campaign in their marketplace. Assuming an affirmative

answer to that question, they worked to customize the global campaign to meet local conditions. A global ad would be customized (for example) by hiring local actors who spoke the local language, substituting songs and music that would be

popular in that country, and avoiding themes and images that might offend local

cultural and religious sensitivities. Marketing personnel in the ServCos generally

took responsibility for marketing material that promoted local brands (such as

Kuat, a Brazilian beverage derived from an Amazon fruit).

Although TCCC generated material for most global campaigns, ServCos

often played a leading role in regional marketing efforts. Under the "charter

model," a BU with a special interest in a particular subject or event often developed platform material, including TV ads and point-of-sale promotions, that would

eventually be shared with other BUs. A campaign focused on the Christmas holiday, for example, might be generated by the Mexican ServCo; a campaign focused

on Ramadan might be generated by the Egyptian ServCo; a campaign focused on

Latin American teens might be generated by the Brazilian ServCo; and a campaign

¹³Foursupply points employed no marketing personnel whatever. The

Brazilian, Egyptian, and Chilean supply points employed an average of 44, 15, and

13 marketing-designated employees, respectively.

- 35 focused on a major soccer event might be generated by the ServCo in the host

country. In such cases TCCC would appoint a charter team, handle negotiations

with major stakeholders, and coordinate efforts between the charter team and other

BUs desiring to use the material. Those other BUs would then adapt the charter

campaign to suit their local needs.

TCCC provided local marketers with various tools to help them craft local

ads and improve local decision-making. The Knowledge & Insights unit (K&I) in

HQ performed data analysis about consumer behavior and made these data available to bottlers and ServCos (e.g., by disseminating monthly "brand health performance" reports to local managers). Customized marketing designs and tactics

were uploaded to the Design Machine. Spark City, created in 2007, was a compilation of various training and information portals including Marketing Xchange,

CSD Portal, and "the DNA of Marketing." These portals supplied local marketers

with access to an extensive database of processes and standardized frameworks for

marketing each of the Company's global brands.

TCCC provided ServCos and bottlers with market research tools to help

them gauge the success of their advertising efforts. K&I created protocols and

metrics for measuring changes in "brand equity," enabling marketers to assess

local consumers' brand awareness and the effectiveness of advertising messages.

- 36 TCCC packaged these metrics into user-friendly tools such as the Marketing

Variance Analysis, Beverage Brand Barometer, and Consumer Beverage Landscape. These tools were implemented throughout the Company's global distribution network, allowing ServCos and bottlers to spot trends discernible only from a

global perspective.

TCCC also provided tools and frameworks for training local marketers. The

Integrated Marketing Communications unit (IMC) at HQ developed the curriculum for training marketers around the world. IMC maintained an online learning

platform--Coca-Cola University--that was used by ServCos to train marketers in

the field. IMC also supervised the Company's contracts with the Olympics, FIFA

(which organizes the World Cup), and the National Basketball Association.

The ServCos generally hired third-party consultants (such as Nielsen) to

perform local market research and testing. They delegated to outside creative

firms the production of consumer advertisements. Outsourced functions included

hiring actors, selecting music, filming commercials, providing voiceovers for global marketing materials, and purchasing advertising time in local media. Outside

consultants often convened focus groups to assess whether a new ad hit the desired spot. TCCC maintained a list of approved agencies (such as Ogilvy) with

- 37 whom it had negotiated master service agreements. Local managers generally

used approved agencies but were permitted to use others if necessary.

Consumer marketing budgets were set in the Company's annual business

plans. Following intense negotiations with local bottlers, each BU proposed a

marketing budget on a TCCC-mandated template. That proposal was reviewed by

the OG and ultimately approved by HQ in Atlanta. Local management generally

pegged direct marketing expenses (DME) to grow in line with gross profit targets.

Trade Marketing and Distribution

The bottlers took principal responsibility for trade marketing, that is, communications and other efforts directed toward (and undertaken through) the retail

establishments (supermarkets, mom-and-pop stores, bars, and restaurants) that

sold the Company's beverages to consumers. Trade marketing, often called "push

marketing," increased consumers' awareness of the Company's brands and stimulated consumer demand. It covered a wide range of activities designed to ensure

that the Company's products were always "within arm's reach of desire."

Bottlers expended efforts to acquire and retain retail customers, sometimes

by creating loyalty programs. To ensure that the Company's products were continuously available to consumers, bottlers had to manage inventory and ensure timely

delivery. Bottlers were responsible for securing advantageous product placement

- 38 in stores, arranging point-of-sale promotions (such as floor decals and end-of-aisle

displays), and offering in-store samples of new products. Bottlers managed most

trade promotions (including coupons, product discounts, and digital redemption

codes), which often keyed off holidays and sporting events. Bottlers often integrated these retail promotions with the Company's global sponsorship activities

and consumer marketing themes. In Europe, where third-party distributors delivered most beverages to retailers, bottlers sent merchandisers into stores to assure

proper product placement and point-of-sale displays.

Responsibility for managing relationships with retail customers was divided

among TCCC, the ServCos, and the bottlers. For historical reasons, the relationship with McDonald's was managed directly by the Company's chief operating

officer at HQ. TCCC's Global Customer and Commercial Leadership group

maintained relationships with the system's top 50 other customers, including WalMart, Tesco, and 7-Eleven. Management of smaller multinational accounts was

generally shared between the bottlers and marketing personnel in the ServCos.

The bottlers had sole responsibility for managing most customer relationships at

the country level.

Bottlers created marketing plans for key accounts, which aligned consumer

marketing with point-of-sale marketing. Bottler field service representatives, who

- 39 lived in the residential communities where retailers were located, formed close

relationships with mom-and-pop stores, enabling them to suggest marketing innovations that included coolers, plasma TVs, and end-of-aisle displays. None of the

supply points--apart from the Brazilian and Chilean supply points--had any staff

devoted to sales.

Through the ServCos TCCC supplied bottlers with a variety of tools to

assist them with in-store marketing. Marketing professionals at HQ designed most

point-of-sale materials; by accessing the Design Machine, bottlers could secure

these images and photographs, then customize them for local consumption. The

"picture of success," the apparent precursor to "Right Execution Daily" (RED),

supplied an ideal image of how a particular store should look to maximize sale of

the Company's beverages. RED, which was developed by Coca-Cola FEMSA in

collaboration with the Company, provided bottlers with recommended point-ofsale materials, suggested price points, inventory management tools, and metrics

for measuring the quality of bottler execution against set standards.

To encourage impulse purchases--which provided much higher margins

than purchases for future consumption--bottlers invested in coolers that were

strategically placed in retail outlets. These investments were significant: At one

point, coolers represented about one-third of CCE's annual capital expenditures.

- 40 These coolers were typically used to chill and display the Company's beverages

exclusively. About two-thirds of the System's global sales were for immediate

consumption, and coolers were essential in stimulating impulse purchases in

warmer climates.

The bottlers owned all Coca-Cola coolers in retail stores. Larger cooler

capacity became necessary as the Company's product line grew to include many

non-CSD beverages. To incentivize investment in coolers, the Company provided

financial support to bottlers through its "Jump Start" program, under which it paid

a percentage of the coolers' cost. When negotiating marketing budgets with the

Company, bottlers generally viewed their costs of purchasing coolers (net of the

Company's subsidy) as marketing expenses on their side of the ledger.

Bottlers also negotiated financial incentives to push sales. Price promotions

for the Company's beverages were a sensitive subject, and such decisions were

generally made jointly by bottlers and ServCo marketing personnel. For large

retailers with greater market power, relationship managers negotiated discounts on

targeted product lines. Bottlers regularly engaged in trade promotions to encourage retailers to give the Company's products optimal shelf space. For restaurants

and mom-and-pop retailers, bottlers promoted Coca-Cola products by supplying

in-kind benefits, such as coolers and Coca-Cola-branded awnings and napkins.

- 41 Bottlers reflected their marketing expenses in different ways, depending on

local accounting conventions. Such expenses might be shown as "marketing deductions from revenue" or as "direct marketing expenses," or they could be included among "selling, delivery, and administrative" costs. However characterized, they were significant. During 2008 CCE had "marketing deductions from

revenue" of $2.5 billion, an amount equal to 11.5% of its net revenue. Other bott1ers showed marketing deductions as high as 18% of their net revenue.

III.

Contractual Relationships

Understanding the rights and obligations of entities within the Coca-Cola

System requires an examination of both written contracts and the parties' course of

dealing. TCCC operated synergistically with its supply point and ServCo affiliates, and it had aligned financial interests with its independent bottlers. The parties often did not spell out the details of their relationships in formal contracts but

left these details to be governed by mutual understanding. In some cases, System

participants operated under outmoded contracts that included terms inconsistent

with their actual behavior.

Supply Point Agreements

TCCC was the ultimate parent of the supply points, and the contracts it executed with them often seem terse and incomplete. (Indeed, petitioner could not lo-

- 42 cate any written agreement with the Egyptian supply point.) The agreements that

existed during 2007-2009 reflected an amalgamation of several (often overlapping) prior contracts and amendments thereto. Over time the text of most contracts converged, making it possible to generalize about the parties' rights and

obligations. We discuss below the prevailing terms of these agreements, noting

deviations where appropriate.

Rights and Obligations

The agreements granted the supply points the rights to produce and sell

concentrate in accordance with TCCC's specifications. The supply points were

authorized to use TCCC's intangible property in connection with their production

and selling rights. They generally lacked any contractual ownership interests in

TCCC's trademarks or other intangible property, and they owned little or no intangible property of their own.¹4

¹4Atlantic,which owned the Costa Rican and Swazi supply points (as disregarded CFCs) and the Egyptian and Irish supply points (as branches), was the registered owner of some trademarks in some jurisdictions with respect to Canada

Dry, Crush, and Dr. Pepper beverages. Atlantic was also the registered owner of

the Schweppes and Cosmos trademarks in most jurisdictions. But none of these

supply points had any ownership interest (direct or indirect) in any trademarks

relating to the Company's core brands. The Brazilian supply point at one time had

rights to sublicense TCCC's trademarks to select bottlers. See infg p. 46.

- 43 a.

Production and Sale of Concentrate

Supply point production rights consisted of the right to produce intermediary "Products," variously defined as "concentrate," "syrups," and/or "beverage

base." We use the terms "Products" and "concentrate" interchangeably. The

agreements distinguish "Products" from "Beverages," which were produced by

bottlers using Products as an ingredient. At no time did any supply point produce

finished beverages.¹5

The supply points agreed to undertake production of concentrate in accordance with TCCC's standards and instructions. TCCC ensured compliance with its

standards by reserving the right to inspect "the methods of preparation and packaging on the premises of [the supply point] at all reasonable times." Compliance

with TCCC's standards required the supply points to obtain secret ingredients,

formulas, and specifications from TCCC. Most contracts expressly granted the

supply point the right to purchase secret ingredients, but no agreement specified

any maximum price that TCCC could charge therefor. Most of the agreements

included a covenant requiring the supply point to protect the secrecy of TCCC's

production know-how:

¹5TCCC'sagreements with its Irish and Mexican supply points included a

provision nominally authorizing them to manufacture finished beverages. In practice neither they nor any other supply point ever did this.

- 44 [The supply point] shall not at any time reveal any information with

reference to the formulae or ingredients of the Products without the

prior written approval of the Company, and shall keep confidential all

such formulae, specifications, standards and instructions.

The contracts also authorized the supply points to sell concentrate. As a

rule, however, they were permitted to sell concentrate only to bottlers that had an

existing contract with TCCC.¹6 The contracts with the Mexican, Chilean, and

Costa Rican supply points permitted them to sell concentrate only as "requested by

the Company and at prices set and/or revised by the Company." The contracts

themselves did not specify any formula or guidelines for pricing concentrate; we

discuss that subject in connection with TCCC's agreements with its bottlers. See

infä pp. 61-66. Each supply point agreed to "keep a full and accurate account" of

"all Products sold by it" and to make that account and relevant invoices available

for inspection by TCCC "at all reasonable times."

Trademarks

Except in the case of the Brazilian affiliate, the agreements granted the supply points no rights or ownership interest in TCCC's trademarks. The agreements

identified TCCC as the "owner" or "registered proprietor" of the trademarks, and

¹6TheIrish and Swazi supply points were also permitted to sell concentrate

to "other parties authorized by the Company to use the Products and the Trademarks in connection therewith."

- 45 TCCC expressly "reserve[d] the right to control all things and acts related to or

involving the use of [the] Trademarks." The supply point agreed "not to do any

act or thing which may impair the ownership and protection" of the trademarks

owned by the Company. The supply point, in short, received only a limited right

to use the trademarks in connection with its production and sales activities.

Unlike the other supply points, the Brazilian supply point was originally allowed to contract with bottlers, and to that end it was permitted to sublicense the

use of TCCC's trademarks.¹7 The Brazilian supply point was authorized, with "the

approval of the Company and * * * Export," to make contracts with bottlers "in

which the right to bottle the Beverage is granted, but only in conformity with the

specifications, formulae, instructions and standards given from time to time by the

Company." Upon termination of the Brazilian supply point agreement, all contracts and sublicenses executed with bottlers involving the use of the Company's

trademarks were to "vest and inure to the benefit of the Company." The Brazilian

supply point explicitly acknowledged that a sublicense "will not in any way affect

¹7TCCCand the Brazilian supply point executed a number of agreements

(and amendments thereto) beginning in 1963. The terms of these agreements are

mutually inconsistent in some respects. In the text we express our understanding

of the salient terms prevailing during the tax years in issue.

- 46 the property rights of the Company concerning its * * * trademarks, which continue to be the Company's exclusive property."

The Brazilian supply point was the only supply point that executed agreements sublicensing to bottlers the use of TCCC's trademarks. In each case, TCCC

was listed in the agreement as a "Parte Interveniente" or "intervening party," thus

acknowledging its consent to the sublicense. In October 2007 TCCC executed

new agreements with all bottlers that held outstanding contracts showing the Brazilian supply point as a counterparty. These new agreements, which show TCCC

as the sole counterparty, appear to have displaced those earlier agreements and

thus effectively canceled the Brazilian supply point's sublicensing authority.

Term Length and Exclusivity

The Brazilian supply point agreement ran indefinitely but could be terminated by TCCC's unilateral action or either party's breach of contract. The other supply point agreements had an initial 12-month term (except the Costa Rica agreement, which had an initial two-month term), and all of them renewed automatically for one-year periods absent prior notice from TCCC or the supply point. Agreements with three of the supply points (Mexico, Swaziland, and Ireland) provided

that, during any 12-month term, either party could terminate the agreement, for

any reason, upon giving 30 or 60 days' notice to the other party.

- 47 No supply point was granted exclusive territorial rights. Each agreement

described a territory--usually the supply point's domestic market--in which the

supply point was expected to operate.¹8 But during the tax years at issue (and for

many years previously) no supply point limited its concentrate sales to the geographical territory in which its manufacturing facility was located. Supply points

regularly sold concentrate to bottlers in other supply points' domestic markets.

And due to the Company's aggressive consolidation of concentrate production, the

seven supply points during 2007-2009 sold concentrate to bottlers doing business

in 150 different countries and autonomous regions (such as Hong Kong).

No supply point was granted any right, express or implied, to guaranteed

production of Coca-Cola products. The record reflects dozens of production shifts

among supply points between 1980 and 2011. In hardly any cases was the entity

that lost production compensated--by TCCC or by the supply point that took over

its production--for the loss of income it thus suffered.

Remuneration

Although TCCC used the 10-50-50 method to compute royalties payable by

the supply points, it never incorporated any aspect of that formula into its written

¹80nlythe Swazi agreement described a multinational territory, covering

much of sub-Saharan Africa. In practice, bottlers in that region purchased concentrate from the Irish and Egyptian supply points as well.

- 48 supply point agreements. Agreements with the Chilean and Costa Rican supply

points included no discussion of payment whatever. The Mexican supply point

agreement specified a royalty computed as a percentage of operating profit. The

Irish and Swazi supply point agreements specified a royalty computed as a percentage of concentrate sales. The Brazilian supply point had agreements that inconsistently recited a one-time royalty of $100 (this version was registered with

the Brazilian trademark office) and an ongoing de facto royalty embedded in the

cost of ingredients purchased from TCCC. It does not appear that TCCC or the

supply points paid much if any attention to these remuneration clauses.

Several supply points paid petitioner a headquarters fee, dubbed "pro-rata."

To calculate these payments petitioner quantified all HQ expenses that supported

multiple foreign affiliates." Petitioner then allocated these expenses to participating supply points under a complex formula, subject to the proviso that no supply

point would be allocated pro-rata in excess of the amount that would be tax-deductible in its local jurisdiction.

The Brazilian and Egyptian supply points did not participate in the pro-rata

regime at all. The Irish supply point paid about $1 billion, and the other four sup-

"Headquarters expenses that supported a specific foreign affiliate were

generally excluded from pro-rata and charged directly to that entity.

- 49 ply points collectively paid about $500 million, of pro-rata during the tax years at

issue. Petitioner credited all of these payments against the supply point's royalty

obligation under the 10-50-50 method, as had been permitted under its 1996 closing agreement with the IRS. The details of the pro-rata arrangement were not

spelled out--and sometimes were not even mentioned--in the supply points' agree-

ments with TCCC.

Service Company Agreements

TCCC contracted (typically through Export) with at least 60 ServCos doing

business throughout the world. The ServCos performed local consumer marketing

and supervised relationships with local bottlers. TCCC or Export generally executed with each ServCo a written agreement employing a standard template that

was modified slightly over the years. Neither party disputes that these contracts

reflected arm's-length terms and compensation.

Standard Terms

Virtually all of the agreements run between the ServCo and TCCC or Export.2° The standard template for these agreements included a boilerplate pream-

2°The only apparent exception to this rule involved the Costa Rican supply

point, which had agreements with eight ServCos through the end of 2009. One of

its counterparties, the Costa Rican ServCo, subcontracted to provide services to

the Ecuadorian ServCo and to receive services from the Colombian ServCo.

- 50 ble, a generic description of services provided, and a confidentiality clause. The

preamble typically stated that TCCC or Export engaged the ServCo because of its

"expertise and know-how on the production and marketing of the Beverages, including sales, advertising, promotion and business development." Most agreements specified a one-year term, which was renewed indefinitely absent notice

from either party of its intent to terminate.

The ServCo typically agreed to supply services that included advice regarding "marketing, advertising and sales promotion." Most agreements executed after

2006 stated explicitly that the ServCo would discharge these tasks by "working

with third party marketing service providers." ServCos agreed to make recommendations as to whether the Company should participate in (i.e., make a financial

contribution to) bottlers' trade marketing expenditures, and to perform research

concerning "regulatory, technical and marketing conditions" that might affect

beverage sales in the local jurisdiction. They also agreed to perform a variety of

computer-related and other back-office functions.

The standard agreement included two remuneration clauses, which together

provided ServCos with cost-plus compensation. The first clause generally stated

that the service recipient (typically Export) would "reimburse or cause to be reimbursed at cost the expenses incurred by * * * [the ServCo] attributable to the ser-

- 51 vices under this Agreement." Generally speaking, expenses were netted against

any income of similar character before being reimbursed. Reimbursable expenses

were determined in accordance with local accounting principles and generally

excluded any income taxes incurred by the ServCo.

The second remuneration clause stated that the ServCo would be paid a

markup on certain expenses described in the first clause. These percentage markups varied among the agreements from a low of 5% to a high of 12%, with the

average markup being between 6% and 7%. These marked-up expenses, when

charged to Export or other service recipient, were typically denominated "fees and

CommiSSiOnS."

Most agreements provided that the ServCo would be paid no markup on

"direct marketing expenses," which included amounts paid to third-party marketing professionals such as advertising agencies, media companies, and creative design firms. The effect of this provision was generally to deny the ServCo any

markup on third-party marketing costs, which typically constituted its largest category of expenses. For reasons not explained in the record, this provision is absent

from many Latin American ServCo agreements.

In 2008 the Company contracted with Ernst & Young (E&Y) to analyze the

services provided by ServCos to Export. E&Y agreed to prepare a "master plat-

- 52 form document" that would provide a basis for transfer pricing reports that ServCos were required to file with their local taxing jurisdictions. E&Y ultimately

produced two master platform documents from which it prepared about 30 local

transfer pricing reports.

E&Y concluded in these documents that the cost-plus compensation outlined in the ServCo agreements was within an arm's-length range. In support of

this conclusion E&Y noted that TCCC controlled the ServCos' annual budgets,

provided major inputs to their marketing efforts, and supplied final approval for all

business plans. At trial an E&Y partner testified that all of these transfer pricing

reports "were written based on the [ServCo] contract[s] and the cost-plus nature of

the service provided" by the ServCos, which he described as "the exact standard

required [under the] transfer pricing analysis paradigm in effect in every country at

the time."

Other Provisions

Shortly before the tax years in issue, several new provisions were introduced into ServCo agreements, chiefly in Europe. Petitioner attributed these

variations to local tax planning undertaken by the Company.

Many agreements executed after 2003 include a new clause explaining the

level of risk assumed by the ServCo and clarifying the ownership of assets gener-

- 53 ated by its marketing efforts and those of the third-party marketing professionals

with whom it contracted. A typical version of the clause read as follows:

ServCo acknowledges that it does not take entrepreneurial risk in

developing marketing concepts because the marketing advice

provided by ServCo is within the strategic guidelines established by

Export for the brands. ServCo also acknowledges that any marketing

concepts developed by third party vendors are the property of Export.

A variation of the first sentence, appearing in the more recent agreements, states

that the ServCo assumed no entrepreneurial risk "because the marketing is contracted for by ServCo with third party service providers and is within [TCCC's]

strategic guidelines."

Petitioner's witnesses testified that this reservation clause was added to the

agreements in order to minimize the risk that the ServCo would be treated by local

tax authorities as creating, in that country, a "permanent establishment" of TCCC

or a foreign supply point. Whatever its purpose, this reservation clause ultimately

appeared in 29 of the 37 ServCo agreements executed after 2004.

The Company added another layer of tax planning to agreements executed

with ServCos in the EU. Those companies were generally subject to value added

tax (VAT) in their home country and were required to include VAT on their in-

voices to Export (a U.S. company). Export would generally be eligible for refund

of the VAT, but such refunds could often be delayed for months or years.

- 54 To mitigate this problem Export internalized its intra-EU service transactions by interposing a Belgian affiliate, S.A. Coca-Cola Services N.V. (CCS), between it and other ServCos in the EU. Export executed a "master service agreement" with CCS, and CCS executed subcontracts with the ServCos doing business

in the EU. Steven Whaley, the Company's general tax counsel during 1996-2008,

testified that the interposition of CCS between the ServCos and Export allowed

ServCos to "zero rate" their services, thus avoiding the need to file VAT refund

claims.

Export's master service agreement with CCS generally resembled TCCC's

standard ServCo contract. However, CCS was allowed no markup on the fees it

paid to the local ServCos for their services. And the master agreement included a

robust reservation clause concerning ownership of intangible assets generated by

the local ServCos' marketing efforts and by the Belgian R&D unit:

ServCo [CCS] * * * acknowledges that any marketing concepts developed by third party vendors or any affiliate of Coca-Cola that provides services to ServCo * * * are the property of EXPORT. * * *.

Any intangibles arising out of the research and development activities

of ServCo are the property of EXPORT.

Invoicing

Petitioner employed a complicated (and not entirely transparent) system to

make inter-company charges on account of services rendered by the ServCos.

- 55 Most ServCo agreements stated that the ServCo "shall invoice" the service recipient--typically Export--in the former's local currency. The agreements specify no

deadlines, and it is unclear whether any actual invoices were ever prepared.

In practice, BU leadership and finance personnel initiated inter-company

charges that placed on the books of each supply point, as they determined to be appropriate, an allocated portion of the amounts that the ServCos (including CCS)

charged to Export. Supply points were thus charged an allocated share of the

ServCos' "fees and commissions" (marked-up costs) plus an allocated share of the

ServCos' third-party marketing expenses. Petitioner has pointed to no document

in the record by which any supply point (except perhaps the Irish supply point) explicitly agreed to bear financial responsibility for these charges.2¹

2¹Therecord includes a January 1, 1998, agreement whereby Atlantic

agreed, on behalf of the Irish supply point (its branch), "to make available funds to

* * * [Export] for reimbursement of the expenses of the ServCos and for payment

of the service fees charged by the ServCos." The agreement also stated that

"Atlantic shall act as paymaster for defraying expenses such as marketing, advertising and promotional expenses incurred or to be incurred within the territory

serviced." There is no evidence establishing that this agreement, which had a oneyear term, remained in effect during 2007-2009. As petitioner notes, the agreement "is less than two pages long and [is] composed largely of WHEREAS

clauses." Petitioner acknowledges that the agreement "does little to explain * * *

[the parties'] relationship or Atlantic Industries' role" and asserts that it "was not a

valid contract because it lacked consideration."

- 56 The method for allocating ServCo fees and DME to supply points is not

explained in any document. Petitioner's witnesses testified that allocations were

based on "the matching principle," i.e., on the principle that expenses should be

matched to revenues. In theory, a supply point was supposed to be allocated fees

and DME charged by a particular ServCo depending on how much concentrate

that supply point sold to bottlers in the geographic market(s) for which that ServCo was responsible. Thus, if a supply point sold concentrate to bottlers in 30

geographic markets, it might be allocated fees and DME charged to Export by 30

separate ServCos. In practice, the allocations of "fees and commissions" and

DME to the seven supply points, as percentages of their gross revenue, varied

widely. See infia pp. 74-75. The record does not explain these discrepancies.

One way or another, most ServCo charges eventually found their way onto

the books of one or more supply point. But there is no evidence that the supply

points received invoices for these services, reviewed the propriety of the amounts

they were charged,22 or had any role in selecting or evaluating the services for

22Petitioner cites only one instance of a supply point's exercise of review

over ServCo charges billed to it. In that case the supply point had been billed for

charges from the Russian ServCo even though it sold no concentrate in Russia. As

one witness noted, this "really stood out and caused them to question."

- 57 which they were made financially responsible. In essence, the supply points were

passive recipients of charges that HQ and BU leadership put on their books.

Bottler Agreements

Petitioner executed formal agreements with hundreds of Coca-Cola bottlers

throughout the world. In virtually all of the agreements TCCC is shown as the

legal counterparty to the bottler.23 These agreements, like the supply point

agreements, were based on templates that reflected standard terms and conditions.

The principal variations among the bottler agreements involved the length of the

contract term, notice periods, choice of law, and the exclusivity of rights granted.

Unlike the supply point agreements, TCCC's contracts with its bottlers explicitly

granted them long-term and generally exclusive rights to produce and sell TCCC's

products within their respective territories.

Rights and Obligations

Production and Sale of Finished Beverages

Through the bottler agreements TCCC licensed bottlers to use its trademarks and other intangible property to produce, sell, and distribute finished bever-

23As noted supra pp. 45-46, the Brazilian supply point was shown as the

counterparty in certain agreements executed with Brazilian bottlers before October

2007, with TCCC appearing as a "Parte Intervenente."

- 58 ages.24 Like the supply points, bottlers covenanted to adhere strictly to TCCC's

production standards and to grant TCCC access to their facilities for periodic quality-assurance inspections. Like the supply points, bottlers were required to buy in-

gredients from TCCC affiliates or TCCC-approved suppliers. And like the supply

points, bottlers enjoyed no right to purchase these inputs at any predetermined

price.

Whereas the supply points were permitted to sell concentrate only to TCCCapproved bottlers, bottlers had complete freedom to sell finished beverages to any

wholesaler or retailer within their respective territories. The bottler agreements

granted TCCC the right to review and approve bottlers' annual business plans,

which were usually developed in coordination with the local BU. Once a business

plan was approved by HQ in Atlanta, the bottler agreed to "prosecute diligently"

the details of the plan and to update TCCC regularly on plan implementation (e.g.,

by submitting sales reports in a format specified by TCCC). Bottlers also made

softer commitments, e.g., "to satisfy fully the demand for each of the Beverages

within the [bottler's] Territory" and "to spend such funds for the advertising and

24Although some bottlers were authorized to produce "syrups," such syrups

were used by the bottler internally in the course of producing finished beverages.

Bottlers invariably covenanted not to sell syrups or concentrate to third parties.

- 59 marketing of the Beverages as may be required to maintain and to increase the

demand * * * in the Territory."

Trademarks

Bottlers had limited trademark rights similar to those granted to the supply

points. While bottlers could use TCCC's trademarks in connection with the production, sale, and distribution of finished beverages, they expressly acknowledged

that TCCC owned the trademarks together with any goodwill generated by the bottiers' use of the trademarks. TCCC reserved the right to control most aspects of

trademark use, and bottlers covenanted to seek approval from TCCC for most advertising, promotions, or other marketing that employed these trademarks. In

practice the local ServCo generally supplied such approval.

Term Length and Exclusivity

The specified term of most bottler agreements was between five and ten

years. The largest independent bottlers, including CCE, Coca-Cola FEMSA, Hellenic, and Coca-Cola Amatil (which did business in Australia), had agreements

with ten-year terms. Explicit approval by TCCC was required to renew a bottler

agreement at the expiration of its stated term; the agreements generally precluded

automatic renewal based on tacit approval. As with supply point agreements,

TCCC reserved rights that allowed it to terminate bottler agreements on no more

- 60 than a few months' notice. Bottlers would have preferred longer term contracts

granting TCCC more limited termination rights, but TCCC consistently refused to

agree to such modifications.

In practice, the mutual dependence between the Company and its bottlers

ensured that bottler agreements were almost always renewed. When a bottler performed badly or encountered financial difficulties, TCCC's solution typically was

not to terminate the bottler, but to acquire it, put it into the "bottler hospital," and

supervise its operations from Atlanta until it had recovered its footing financially

and operationally. See supra pp. 17-18. TCCC would then divest the bottler to

new owners with its bottler contract intact.

Many of the Company's major bottlers were public companies required to

disclose financial information in annual reports and public filings. CCE, one of

the top three Coca-Cola bottlers, described its relationship with TCCC as follows:

While the [bottler] agreements contain no automatic right of renewal

* * * we believe that our interdependent relationship with TCCC and

the substantial cost and disruption to that company that would be

caused by nonrenewals ensure that these agreements will continue to

be renewed.

For this reason most major bottlers, including CCE, Coca-Cola FEMSA, and

Hellenic, assigned to their bottling contracts an indefinite useful life for accounting and financial statement purposes.

- 61 Bottler agreements also differed from supply point agreements in the exclusivity of the rights they granted. Supply points enjoyed no exclusivity whatever: They were always at risk of having TCCC shift their production to another

supply point, which could then sell to bottlers in their home country. By contrast,

TCCC's agreements with most bottlers included a geographically defined market

in which the bottler was granted exclusive rights to produce and sell beverages.

The legal landscape was different in the EU and the European Economic

Area, where the Treaty of Rome guaranteed the free movement of goods among

member states. For that reason, explicit exclusivity clauses are generally absent

from European bottler agreements. But in practice bottlers respected each other's

notional territories and rarely attempted to sell into them. As explained by John

Brock, a longtime industry veteran who formerly led CCE, there was within the

EU "an implied geographic exclusivity, but it was not spelled out."

Remuneration

The bottlers remunerated the Company through the price they paid for concentrate. That price in effect bundled all of the Company's valuable inputs into a

single bill, ostensibly for concentrate. By paying this bill, bottlers secured not

only the physical beverage base, but the entire package of rights and privileges

they needed to operate efficiently as Coca-Coca bottlers. This package included

- 62 the right to use TCCC's trademarks, access to TCCC-approved suppliers, access to

critical databases and marketing materials, and the expectation of ongoing consumer marketing support from TCCC and the ServCos.

TCCC reserved the unilateral right to set the concentrate price, which in

theory enabled it to determine the bottler's profitability. But "in the real world,"

as petitioner notes, "concentrate prices were established through local negotiations." These local negotiations "aimed to equitably share System operating profit," i.e., the total pre-tax operating profit accruing to the Company and the bottler

from that bottler's sales of the Company's beverages.

Generally, the parties' goal was to achieve something like a 50%-50% split

of the System profit. In practice, the division usually ranged between 45% and

55% in favor of one party or the other. The bottler might negotiate for a share

near the high end of this range if (for example) it faced economic headwinds or

expected to incur large capital expenditures. By using estimates of future revenues and expenses contained in budgets and business plans, TCCC and the bottler

could negotiate a concentrate price that was expected to deliver the intended share

of System profit to each party.

Adjustment to the concentrate price was a major undertaking that required

ultimate approval by HQ in Atlanta. An officer of one BU described it as "the

- 63 mother of all negotiations with a bottler." Such negotiations were typically undertaken only once every few years. Between those revisions, unexpected fluctuations in consumer demand, local inflation rates, or currency exchange rates could

occur. If those risks materialized, use of a fixed concentrate price could throw off

the intended division of System profit.

TCCC and its bottlers devised two solutions to this problem. One solution

was some form of variable pricing. In Latin America and Eastern Europe in particular, bottler agreements increasingly adopted "incidence pricing," whereby the

concentrate price was initially determined at a fixed price and then "trued up" to

reflect actual sales (incidences) when more complete financial data became available. In Western Europe, where currencies and inflation rates were generally less

volatile, TCCC and its bottlers employed a subtler version of variable pricing, keyed to bottlers' prior-year sales or projected current-year revenues.

A second solution was to adjust, as compared with the original business

plan, the marketing expenditures that the Company and its bottlers were going to

make. For example, if the System profit split moved unexpectedly in the Company's direction, it might agree to reimburse the bottler for certain trade marketing

expenses. Or the Company might agree to increase its consumer marketing expenses in the bottler's territory, which would be expected to increase the bottler's

- 64 sales and profits. In 2005, for example, TCCC appeased calls by Latin American

bottlers for lower concentrate prices by (among other things) agreeing to reinvest

an additional 20% of concentrate revenues in mutually agreed marketing projects.

Conversely, if the System profit split moved unexpectedly in the bottler's direction, the Company might reduce its support for local trade marketing, or the bottler

might increase its marketing expenditures, e.g., by accelerating placement of coolers in retail stores.

Generally speaking, bottlers paid the full concentrate price to the supply

point(s) from which they purchased concentrate. In some markets, however, the

Company engaged in "split invoicing." Under this practice, the supply point invoiced the bottler for a portion of the concentrate price, and the local ServCo issued a separate invoice to the bottler for the remainder of the concentrate price.

Where split invoicing occurred, the ServCo wound up receiving a portion of the

revenues that the supply point would otherwise have received as payments for

concentrate.

"Split invoicing" was used chiefly with bottlers in countries that were susceptible to high inflation or exchange-rate volatility. By having the bottler direct a

portion of the concentrate price to a ServCo in the same country, the Company

- 65 was able to mitigate the effects of currency controls, delayed VAT refunds, and