PepsiCo Prevails in High Court Battle Against ATO Over Royalty Withholding Tax

PepsiCo has secured a significant victory in the High Court of Australia against the Australian Taxation Office (ATO) in a closely watched dispute over royalty withholding tax linked to intellectual property. The ruling, delivered on August 13, comes after the ATO was last year granted special leave to appeal the Federal Court’s decision in PepsiCo v Commissioner of Taxation. PepsiCo was represented by PwC, while the ATO received legal advice from Australian-headquartered law firm MinterEllison.

The case centered on two exclusive bottling agreements between PepsiCo and Stokely-Van Camp (SVC), both US-based companies. Under these arrangements, Schweppes Australia (SAPL) received concentrate to produce finished beverages for retail sale within Australia. The ATO contended that certain portions of the payments related to these agreements amounted to royalties, making them subject to royalty withholding tax (WHT).

In June 2024, the Federal Court’s full court—Justices Nye Perram, Craig Colvin, and Ian Jackman—ruled that “the payments made by the bottler to the seller were for concentrate alone and did not include any component which was a royalty for the use of PepsiCo/SVC’s intellectual property.”

By a 4–3 majority, the High Court dismissed the ATO’s appeal with costs, rejecting its arguments. The court found that the price paid for the beverage concentrate—supplied by a Pepsi affiliate in Singapore to an Australian bottler—did not embed any royalty component, and therefore no WHT was applicable. Furthermore, it concluded that Pepsi US derived no income under the relevant licensing structure.

PepsiCo, the court determined, had not obtained any improper tax advantage from the transactions. Justices Gordon, Edelman, Steward, and Gleeson wrote that the contractual price SAPL paid to a PepsiCo Group company was solely for goods sold and delivered.

“The commissioner did not dispute that it was an arm’s-length price, or a fair price, or that it was not disproportionately high. When the price paid for goods has those characteristics, it cannot be said that a part of the price paid for those goods is payment of a royalty for the use of intellectual property applied to products partly made with those goods,” they stated.

They further clarified: “Observing that the sale of the products produced using the goods increased the value of the PepsiCo intellectual property does not show that SAPL paid any part of the amount paid for concentrate to, or for the benefit of, PepsiCo for using the PepsiCo intellectual property.”

The court also found that no diverted profits tax (DPT) applied, ruling that the ATO’s proposed counterfactual scenarios were unreasonable. PepsiCo had demonstrated that there were no reasonable alternatives to its actual conduct, and therefore no tax benefit existed.

Błażej Kuźniacki, adviser and senior manager for PwC Netherlands, remarked after the decision that the finding—where a lack of reasonable counterfactuals without a tax benefit could neutralize anti-tax avoidance rules—might have significant implications for similar cross-border tax disputes globally. According to Kuźniacki, the judgment carries substantial comparative and practical value for international tax litigation.

By fLEXI tEAM