PepsiCo Australia's IP Royalties Appeal Brings Taxpayer Certainty, Experts Say

PepsiCo's victory in its legal dispute with the Australian Taxation Office (ATO) is seen as a significant win for taxpayer certainty, according to Australian tax experts.

On June 26, the Federal Court of Australia’s full court ruled in favor of PepsiCo against the ATO, concerning two exclusive bottling agreements involving US-resident companies PepsiCo and Stokely-Van Camp (SVC). Under these agreements, Schweppes Australia (SAPL) received concentrate to produce finished beverages for sale in Australia. A member of the PepsiCo Group incorporated in Australia was designated by PepsiCo and SVC as the seller of the concentrate to SAPL.

The ATO had previously contended that portions of payments related to the bottling agreements were royalties and therefore subject to royalty withholding tax (WHT). However, 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.” This decision overturned a previous ruling from November, where the Federal Court of Australia determined the payments were subject to royalty WHT as they related to the use of PepsiCo’s intangible assets held by its US-based companies. Federal Court Justice Mark Kranz Moshinsky had suggested that even if royalty WHT didn’t apply, the diverted profits tax (DPT) could. However, in the latest judgment, Justices Perram and Jackman outvoted Colvin on the DPT issue, ruling against the ATO.

Megan Bishop, a tax disputes partner at law firm Holding Redlich in Melbourne, commented that the court’s “contract-centric approach” in analyzing the WHT issue represents a win for taxpayer certainty. She noted, “It gives contracting parties more power to control and influence the character of their deals, and ensure that character is not impacted or diminished by rogue operators in practice. The decision recognizes the need to appreciate the numerous benefits that move under complex commercial negotiations of this nature and serves as an important reminder to not think too narrowly on that issue.”

Bishop also highlighted the complexities of relying on expert evidence based on assumptions and arguing cases based on hypotheticals. Neil Pereira, managing director with Alvarez & Marsal Tax in Sydney, echoed this sentiment, stating the case provided clarity for taxpayers. He noted that advisers and taxpayers sought clarity on apportionment, which the original Federal Court judgment did not provide. However, clarity was achieved in the recent appeal concerning the form and substance of arrangements and what was contracted and paid for.

Benedicte Olrik, managing director for TP at Andersen in Australia, suggested PepsiCo benefited from applying transfer pricing (TP) principles and receiving better advice on appeal. She remarked, “I am unclear to what extent TP principles were considered by the experts in the PepsiCo case or why the parties did not employ experts skilled in TP methodologies and principles in the initial court case. However, it is my opinion with the easy gesture of being retrospective, that when PepsiCo applied TP principles and employed proper advisers in the appeal, it turned out much more favorable for them.”

PepsiCo was represented by PwC in its appeal, while the ATO was advised by MinterEllison. Olrik added, “Further, imagine if PepsiCo had done this initially, then it is likely that the arrangements would not have been challenged by the ATO, there wouldn’t have been a dispute and DPT or royalty WHT wouldn’t have been raised.”

Danielle Sherwin, a partner at RSM Australia, speculated that the ATO might seek leave to appeal to the High Court. However, she also noted that the High Court generally prefers to leave tax cases to the Federal Court. “Given the importance of this case to the ATO and its strong stance regarding royalties and intangible related issues, it will be interesting to see whether this is now the end of the road for the PepsiCo case,” she said.

The tax community is likely to welcome the clarity provided by the ruling, hoping it marks the end of the dispute with the ATO. 

By fLEXI tEAM