ATO Seeks High Court Appeal Following Federal Court Ruling in Favor of PepsiCo

The Australian Taxation Office (ATO) has applied for special leave to appeal to the High Court of Australia, challenging the recent Federal Court decision in the closely-watched case of PepsiCo v Commissioner of Taxation. The ATO announced on August 9 that it had made the application but noted that it cannot provide further comments on the matter while the High Court considers the special leave request.

In June, PepsiCo secured a significant victory in its appeal against an Australian ruling concerning royalty withholding tax (WHT) related to intellectual property. The Federal Court of Australia’s full court ruled in favor of the soft drink giant on June 26, overturning an earlier decision.

The case revolved around two exclusive bottling agreements between PepsiCo and Stokely-Van Camp (SVC), both of which are U.S.-resident companies. Under these agreements, Schweppes Australia (SAPL) received the concentrate needed to produce finished beverages for retail sale in Australia. According to an earlier court ruling, a PepsiCo Group member incorporated in Australia was nominated by PepsiCo and SVC as the seller of the concentrate to SAPL.

The ATO had argued that portions of the payments made in connection with the bottling agreements constituted royalties and were therefore subject to royalty WHT. However, in their June judgment, Justices Nye Perram, Craig Colvin, and Ian Jackman concluded, “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.”

This ruling overturned a previous decision from November, where the Federal Court of Australia had determined that the payments were subject to royalty WHT to the extent they related to the use of PepsiCo’s intangible assets held by its U.S.-based entities. Federal Court Justice Mark Kranz Moshinsky had also held that if royalty WHT did not apply, then the diverted profits tax could be considered as an alternative.

However, in the June 26 full court judgment, Justices Perram and Jackman outvoted Justice Colvin on the diverted profits tax issue, ultimately ruling against the ATO. Perram and Jackman agreed that PepsiCo had successfully argued that “the assessments to diverted profits tax are excessive” and that the ATO had “no reasonable alternative” to the tax.

Australia’s diverted profits tax is designed as an anti-avoidance measure targeting significant global entities (SGEs) to ensure that their tax obligations reflect their activities in Australia and to prevent the diversion of profits offshore.

By fLEXI tEAM