Following the legal impediments faced by Medtronic PLC (MDT) to avoid a $1.4 billion tax in the United States, Facebook Inc. (FB) and The Coca-Cola Co. (KO) may be next to face the Internal Revenue Service (IRS) over the use of foreign payments to lower their taxes.

Over the years, leading multinational companies (MNC) have been at loggerheads with the IRS on matters of transfer pricing—a method that has been used by MNCs to reduce their tax liabilities by assigning lower value to intangible assets like intellectual property (IP). Companies benefit by shifting these intangible assets to offshore subsidiaries operating in low-tax jurisdictions like the Cayman Islands, Puerto Rico or Ireland.

Accounting for Intellectual Property

While it is easy to account for economic activity that involves measurable features like sales and employees, things gets tricky when trying to account for intellectual property. For instance, if a person performs a Google search from his home computer based in Finland, the search results may be rendered by U.K.-based Google servers, while the whole search operation belongs to the Google company which is based in the U.S. However, the bulk of value in the “global” activity lies in the intellectual property that makes the search possible. Ambiguity exists about where and how much to account for this IP value, making it a matter of contention between the MNCs and IRS.

In case of Medtronic, the Dublin, Ireland-based company, which has retains operational headquarters in Minneapolis, transferred $2.2 billion worth of intercompany licenses to a Puerto Rican manufacturing affiliate for the tax years 2005 and 2006. The IRS claims that the company’s actions are a “classic case” of a U.S. multinational shifting income from its highly profitable U.S. operations and intangibles to an offshore subsidiary in a tax haven by charging an artificially low rate for the intangibles, reports Bloomberg. The agency claims that Medtronic undervalued royalty rates paid to it by the Puerto Rican affiliate for intellectual property used in making medical devices there. A recent ruling by a federal appeals court on Aug. 16 sent the Medtronic case back to the U.S. Tax Court for review. While Medtronic has already made a $1.1 billion payment to the IRS to cover for the possible taxes, the company could now owe more if the court decides otherwise during the review.

Other MNCs Could Face Similar Fate

Calling the recent development as “an unmitigated disaster for Medtronic,” tax expert Robert Willens adds that it is a “real blow” to other companies using transfer pricing and could make it more difficult or even impossible to use techniques that price transactions to lower taxes.

The IRS opposed a similar transfer pricing calculation by Facebook in 2016 when the social media giant claimed it transferred $6.5 billion of intangible assets to Ireland in 2010. With the trial expected to start next August, Facebook may be required to pay up to $5 billion in taxes (without penalties and interest), if IRS wins the case.

Beverage giant Coca-Cola also has a similar matter with the IRS over $3.3 billion worth of taxes. The issue pertains to royalty agreement under which the company transferred IP value to its offshore subsidiaries located in Africa, Europe and South America between 2007 and 2009. (See also: Make Money on Your Intellectual Property.)

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