COCA-COLA SAYS TRANSFER PRICING REGS SHOULD BE WITHDRAWN.

In accordance with the notice of proposed rulemaking regarding the above-referenced proposed income tax regulations ("proposed regulations"), The Coca-Cola Company submits the following comments.

Notwithstanding the obvious effort expended in drafting the proposed regulations, after careful examination and analysis, The Coca-Cola Company is of the opinion that they need substantial revision to address numerous significant concerns. The proposed regulations raise many issues relating to practicality and fairness and are a marked departure from judicial precedent and currently- accepted conventions. The proposed regulations require costly, sophisticated economic analyses and presuppose the availability of reliable and comparable data. The necessary data are not generally available and available broad industry data will not produce accurate results. The proposed regulations create an unreasonable standard whereby the taxpayer will be judged in retrospect, using information which did not exist when the taxpayer set its transfer prices. This concept is contrary to R. T. French v. Commissioner, 60 T.C. 836 (1973).

The broad power given the District Director to disregard contractual arrangements or the absence thereof, and to combine the effect of transactions is contrary to Sundstrand v. Commissioner, 96 T.C. 226 (1991) and Bausch & Lomb, Inc. v. Commissioner, 92 T.C. 525 (1989), aff'd, 933 F.2d 1084 (2nd Cir. 1991), respectively. Further, the proposed regulations' focus on mechanical tests overlooks the "judgmental" profit split analysis likely to be required in complex situations and adopted by the Tax Court in PPG Industries, Inc. v. Commissioner, 55 T.C. 928 (1970), and Eli Lilly & Co. v. Commissioner, 84 T.C. 996 (1985), aff'd in part, rev'd in part, rem'd in part, 852 F.2d 855 (7th Cir. 1988).

The proposed regulations substantially differ from the current regulations under section 482. They constitute a unique approach to transfer pricing and, as such, are contrary to the transfer pricing rules currently employed by our foreign trading partners. This change of approach will likely give rise to increased domestic litigation of section 482 issues and to increased disputes with foreign taxing authorities.

Selected specific comments follow.

OVERRIDING SAFE HARBOR

The essential goal of section 482 is the clear reflection of income and the proposed regulations try to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer. Proposed regulations section 1.482-1(b)(1). This effort is to prevent a taxpayer from enjoying disproportionately large or undeserved deductions in the United States and the accumulation of income in a low-tax jurisdiction. Toward this end, it would be consistent with the underlying purpose of section 482 to establish an overriding safe harbor providing that section 482 would not apply if 75% of the aggregate current earnings and profits of all controlled foreign corporations is actually (or electively deemed to be) repatriated to the United States and thus made subject to the normal United States tax regime applicable to such earnings and profits. This test would not be applied on a "per country" basis to avoid the inequity of "repatriation" in those situations where funds would not be remittable.

THE USE OF DATA FROM SUBSEQUENT YEARS

"In determining whether controlled taxpayers have dealt with each other at arm's-length", proposed regulations section 1.482- 1(b)(1) provides that the District Director may broadly consider data "before, during and after the taxable year under review". This multi- year concept is specifically utilized in the comparable profit interval ("CPI") which is key to both the comparable adjustable transaction method and the comparable profit method in proposed regulations sections 1.482-2(d)(4), (5) and 1.482-2(f). The CPI relies upon "actual results (rather than projections) from the three- year period that includes the taxable year under review, the preceding year, and the following year". Proposed regulations section 1.482-2(f)(2). In doing so, the proposed regulations impose an unreasonable standard upon the taxpayer requiring it to be clairvoyant and to use unknown future years' data in setting the current year's transfer price and in filing current year's returns. In contrast, years later, the District Director will have the benefit of "20/20 hindsight" when auditing, using actual results to question the taxpayer's contemporaneous exercise of good judgment based on the best projections then available to it. This situation is further aggravated by the District Director's ability to impose significant penalties under section 6662, if, in retrospect, the taxpayer has failed, in the District Director's opinion, to set arm's-length transfer prices.

In accordance with current authority, taxpayers should be allowed to use existing data to establish current year's prices. Absent this, the proposed regulations need to establish a workable method for taxpayers to use in setting current prices using future unknown data. Once a reasonable methodology is established for taxpayers to follow, the District Director could objectively audit how well the taxpayer implemented the methodology. The taxpayer's successful implementation of the methodology would protect it from adjustments to its transfer prices during the years in question and from penalties. Further, if the District Director is able to use hindsight in adjusting a taxable year's transfer prices with data from subsequent years, the taxpayer should be allowed to amend returns for all open years to come within the arm's-length pricing requirement. Such amendment should be permitted without the imposition of penalties.

COMPETENT AUTHORITY

The proposed regulations give rise to renewed concern regarding the availability of prompt and effective competent authority relief to protect the taxpayer from double taxation as foreign governments refuse to follow adjustments made under the proposed regulations. Taxpayers especially need protection when adjustments would involve non-treaty countries where United States competent authority support for the correlative adjustment is unavailable. Certain provisions of the proposed regulations, such as the requirement for annual adjustments and the developer/assister rules, as well as the proposed regulations' overall level of complexity, greatly enhance the likelihood of disputes with foreign taxing authorities.

To address those situations when the United States and foreign competent authorities are unable to agree on a method to relieve double taxation, or when competent authority support is unavailable, the United States Treasury should initiate bilateral or multilateral agreements with foreign governments providing for binding arbitration to fairly resolve issues in dispute. In those cases where the foreign government does not permit the foreign tax benefit from a necessary correlative adjustment to be remitted, the section 482 adjustment should be held in abeyance with no loss of the corresponding foreign tax credit.

EFFECTIVE DATE

The proposed regulations are to be effective for taxable years beginning after December 31, 1992. Yet, since the preamble also states that the Internal Revenue Service considers their application to be a reasonable method for applying the commensurate with income standard contained in section 482, there is concern that Internal Revenue Agents will apply them exclusively as the best "state of the art" guidance. Given the proposed regulations' complexity and the substantial level of uncertainty concerning their interpretation and application, the preamble and text of the proposed regulations should be revised to emphasize that they embody a collection of methods which may be reasonably applied in appropriate circumstances but that they are not to be applied to the exclusion of other reasonable methods.

COST-SHARING UNDER SECTION 936(h)

The Tax Reform Act of 1986 amended the cost-sharing method under section 936(h)(5)(C)(i) to provide that the cost-sharing payment cannot be less than the inclusion or payment which would be required under section 367(d)(2)(A)(ii) or section 482 if the section 936 corporation were a foreign corporation. The Internal Revenue Service has recognized the difficulty taxpayers face in considering an election to switch from the cost-sharing method to the profit split method for tax years beginning after December 31, 1986, and the deadline for this election has been extended numerous times. Currently, under Rev. Proc. 91-53, 1991-2 C.B. 782, a calendar year section 936 corporation has until September 15, 1992 to make the election.

Taxpayers still have no firm administrative guidance to assist in determining whether to switch methods. The proposed regulations provide no guidance as to how the commensurate with income standard applies for purposes of calculating the cost-sharing payment required by the cost-sharing method under section 936(h). It is clearly uncertain what the interpretation of the commensurate with income standard ultimately will be. Taxpayers cannot anticipate how the commensurate with income amount will be calculated until the proposed regulations are finalized, nor do they have a realistic anticipation of what data will be necessary to make such a calculation or the source of that data.

Accordingly, the current September 15, 1992 deadline should be extended until the extended due date for filing returns for the tax year in which the final regulations interpreting the commensurate with income standard are issued. For example, if the final regulations were issued in April, 1993, a calendar year section 936 corporation would have until September 15, 1994, to elect to switch from the cost-sharing method to the profit split method and to file the necessary amended tax returns for tax years beginning after December 31, 1986.

In light of the significant controversy surrounding the proposed regulations, The Coca-Cola Company urges that they be withdrawn for further development.

In the event of questions or the need for clarification relating to the above comments, please contact William P. McClure of McClure, Trotter & Mentz at (202) 659-3400, or the undersigned.

Very truly yours