The Israel Tax Authority is demanding that The Coca-Cola Company (NYSE: KO) should pay tax of NIS 160 million on royalties received from privately held Israeli company The Central Bottling Company (which holds the Coca-Cola franchise for Israel) for use of the Coca-Cola brand. The dispute concerns tax liabilities for 2010-2011.
The Israel Tax Authority and The Coca-Cola Company have been in talks for some time about the size of the liability, but the Authority is not prepared to withdraw the demand. It rejected an objection filed by the company, and recently issued the disputed tax assessment, against which the company intends to file an appeal in the Tel Aviv District Court, for which purpose it has hired the services of law firm Goldfarb Seligman & Co.
Taxation of royalties is covered by the taxation treaty between Israel and the US, which contains provisions on withholding tax whereby both Israel and the US are entitled to tax royalties derived by a resident of one of the countries from sources in the other.
The tax liability is determined by "place of use". If the place where the right on which the royalty is paid is used is outside Israel, the royalties will not be taxable in Israel. The place of use of a right or a patent is determined according to where the use is legally protected, as opposed to where the right or patent was developed. Accordingly, the source of royalty revenue is the place where the right on which royalties are paid has legal protection, which is usually the place where the relevant product is sold and used.
Published by Globes [online], Israel business news - www.globes-online.com - on August 1, 2017
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