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High
Court - Pepsico: Commissioner loses on royalty and DPT claims
In a majority decision, the High Court has dismissed the
appeals of the Commissioner from the decision of the Full Federal Court
in PepsiCo Inc v FCT [2024] FCAFC 86. In that case the Full Court ruled
that payments made by Schweppes Australia Pty Ltd to PepsiCo Beverage
Singapore Pty Ltd for the supply of concentrate was not a royalty payment
for the use of intellectual property, and that therefore it was not
subject to withholding tax. The Full Court also ruled that diverted
profits tax ("DPT") under s 177J of Pt IVA of the ITAA 1936 did
not apply to the arrangement. In dismissing the Commissioner’s appeals,
the High Court held that on proper construction of the relevant
agreements, the payments were for concentrate only and did not include
any component which was a “royalty”. It also held that no tax benefit had
been obtained by Pepsico (or others) in connection with a scheme under s
177J and that therefore DPT did not apply. (FCT v PepsiCo Inc and Ors v FCT [2025] HCA 30, 13
August 2025)
ATO response: The
ATO said it “welcomes the High Court’s
clarification of these important areas of law”. It also said it is
currently considering this decision including any broader impact it may
have on the reasoning set out in draft Taxation Ruling TR 2024/D1 Income
tax: royalties - character of payments in respect of software and
intellectual property rights.
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Commissioner of Taxation v PepsiCo, Inc
H I GH C OU R T OF AU ST R ALI A 13 August 2025 COMMISSIONER OF TAXATION v PEPSICO INC COMMISSIONER OF TAXATION v STOKELY-VAN CAMP INC COMMISSIONER OF TAXATION v PEPSICO INC COMMISSIONER OF TAXATION v STOKELY-VAN CAMP INC COMMISSIONER OF TAXATION v PEPSICO INC COMMISSIONER OF TAXATION v STOKELY-VAN CAMP INC [2025] HCA 30
PepsiCo Australia Tax Spat Sparks Global Concern for Companies
PepsiCo Inc.'s legal battle with Australia over cross-border transactions will soon result in a final high court ruling that threatens to hike taxes for multinational companies.
The Australian Tax Office is arguing that PepsiCo owed taxes on royalties that were “embedded” in a sale of beverage concentrate from a Singapore Pepsi affiliate to an Australian bottler. The company won an earlier round in a lower court.
A loss for PepsiCo in the case could particularly expose industries such as pharmaceuticals and technology to higher royalty taxes, and may determine the extent to which Australia can use its diverted profits tax.
Reminder:
Special leave to appeal to High Court in Bendel case
The ATO has advised that it has updated its Decision
Impact Statement on the decision of the Full Federal Court in FCT v Bendel
[2025] FCAFC 15 in which the Court confirmed that Div 7A did not apply to a UPE
made by a trust. It has been updated to note that special leave to appeal
decision was granted to the Commissioner by the High Court on 12 June
2025.