Federal Court Rules in Favor of PepsiCo in Royalty Withholding Tax Case

The ruling for PwC’s client deals a significant blow to the Australian Taxation Office (ATO) and its capacity to tax multinationals on complex cross-border transactions. PepsiCo has successfully appealed an Australian ruling regarding royalty withholding tax related to intellectual property.

On June 26, the Federal Court of Australia’s full court ruled in favor of the soft drink company against the ATO. Pepsi was represented by PwC in its appeal, while the ATO was advised by the Australia-headquartered law firm MinterEllison.

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

Previously, the ATO argued that certain portions of payments made under the bottling agreements were royalties and thus subject to royalty withholding tax (WHT). However, in today’s judgment, Justices Nye Perram, Craig Colvin, and Ian Jackman ruled: “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 decision overturns a previous ruling from November, where the Federal Court of Australia determined that the payments were subject to royalty WHT as they pertained to the use of PepsiCo’s intangible assets held by its U.S.-based companies. Federal Court Justice Mark Kranz Moshinsky had also suggested that even if a royalty WHT didn’t apply, the diverted profits tax could be considered instead.

However, in today’s full court judgment, Justice Colvin was outvoted on the diverted profits tax issue by Justices Perram and Jackman, leading the court to find against the ATO. Perram and Jackman concurred that PepsiCo had effectively 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 an anti-avoidance measure targeting significant global entities (SGEs). According to the ATO, this measure ensures that SGEs' taxes reflect their activities in Australia and prevents the diversion of profits offshore.

Following the previous ruling, DLA Piper Australia partner Jock McCormack noted in ITR that the Federal Court of Australia’s decision appeared to bolster the ATO’s position in tax disputes with multinationals. However, this recent judgment casts that advantage into doubt. By fLEXI tEAM