The High Court of Australia has ruled in favour of PepsiCo, dismissing six appeals brought forward by the Commissioner of Taxation. Here, taxation partners unpack the decision and discuss the implications for tax practitioners moving forward.
Editor’s note: This story first appeared on Lawyers Weekly’s sister brand, Accountants Daily.
The decision
The nation’s highest court has, by majority decision, dismissed six appeals from the PepsiCo, Inc. v Commissioner of Taxation [2024] FCAFC 86 decision of the full court of the Federal Court of Australia, ruling in favour of the taxpayer.
The High Court, made up of Chief Justice Stephen Gageler and Justices Michelle Gordon, James Edelman, Simon Steward, Jacqueline Gleeson, Jayne Jagot, and Robert Beech-Jones, dismissed each appeal on Wednesday, 13 August, via a 4-3 majority decision.
The appeals were dismissed on the grounds that royalty withholding tax was not payable under s 128B(2B) of the Income Tax Assessment Act 1936 (ITAA) and that PepsiCo and Stokely-Van Camp (SVC) had not obtained a tax benefit, therefore were not liable to pay diverted profits tax (DPT).
As previously reported by Lawyers Weekly’s sister brands, Accountants Daily and Accounting Times, this decision came after PepsiCo successfully appealed a Federal Court finding in June 2024, which found that it was liable for royalty withholding tax payments, before the High Court granted the Australian Taxation Office (ATO) special leave to appeal the reversal in November 2024.
Before it was reversed by the full court, PepsiCo was found to be liable for royalty withholding tax because of payments made to bottling company Schweppes Australia under exclusive bottling agreements (EBA) to distribute Pepsi, Mountain Dew, and Gatorade products.
The original grounds of the case brought forward by the Commissioner of Taxation stated that the EBAs were allowed for trademark use, yet PepsiCo and SVC had made no payments for IP rights.
Implications
Prior to the decision in favour of PepsiCo, John Ioannou, Macpherson Kelley’s head of tax, said: “If PepsiCo prevails, it will be a win insofar as offering reliance on well documented, commercially grounded arrangements as a means to legitimately avoid being classified as royalties.”
Once the decision was handed down, Lisa To, Bartier Perry partner, said it offered vital clarity on the often-complex boundary between payments for goods and intellectual property (IP).
“The court affirmed commercial payments frequently represent a single, integrated transaction that cannot be artificially dissected to separate goods from IP rights. The court looked beyond contractual labels, confirming that even where prices are fair and arm’s length, part of the payment can constitute consideration for IP use,” she said.
“At the same time, the court found that payments were received by PepsiCo Beverage Singapore in its own right, meaning neither PepsiCo nor Stokely-Van Camp ‘derived’ income that triggered royalty withholding tax or DPT.”
Sue Williamson, Dentons tax partner, echoed these sentiments, noting the decision provided much-needed clarity on the treatment of cross-border payments involving IP.
In addition, Williamson said the decision also marked a significant setback for the ATO’s expansive interpretation of royalties and DPT.
“The decision does not stand for the proposition that embedded royalties cannot arise. As always, the outcome turned on the specific facts. That the contracts clearly characterised the payments for goods, not for IP,” she said.
“Branding rights were neither separately granted nor emphasised, and the pricing reflected a bundled transaction for goods. Importantly, the Commissioner had not contended that the price for the concentrate had been inflated to hide a secret royalty outlay.”
“The DPT claim failed (by majority) because PepsiCo was able to show that there was no principal purpose of tax avoidance. The decision underscores the importance of commercial rationale in cross-border arrangements and the critical need for evidence to support that rationale. Multinationals should ensure they document robust, non-tax business reasons for their international structures.”
To added that, from this decision, the ATO would maintain close scrutiny on cross-border deals involving embedded IP.
“Tax advisers should proactively review contracts to ensure commercial terms reflect substance. By broadening the definition of ‘royalty’ to include payments for goods bundled with intellectual property, the court has extended the ATO’s reach beyond multinationals to include SMEs engaged in importing branded products under exclusive supply arrangements,” she said.
Angelina Lagana, Corrs Chambers Westgarth head of tax controversy, also weighed in on the decision and said multinational groups would need to prepare for scrutiny from the ATO.
Lagana attributed this to the fact the ATO had significant funding and would continue to focus on compliance activity such as the deductibility of costs, taxes on royalty payments for the use of intangibles, anti-avoidance considerations related to the movement of intangibles to low-tax jurisdictions and/or arrangements entered into with the primary purpose of avoiding tax, as well as the mischaracterisation of royalty payments.
“Multinationals must prepare for this by reviewing whether any payments they are making are for the use of intangibles, whether their Australian legal advisers have reviewed intercompany contracts with Australian parties from an Australian tax perspective, how payments are characterised (i.e. are they an embedded royalty), and how the ATO might scrutinise their arrangements,” she said.
The full case citation is Commissioner of Taxation v PepsiCo Inc; Commissioner of Taxation v Stokely-Van Camp Inc; Commissioner of Taxation v PepsiCo Inc; Commissioner of Taxation v PepsiCo Inc; Commissioner of Taxation v Stokely-Van Camp Inc; Commissioner of Taxation v Stokely-Van Camp Inc [2025] HCA 30.
