The High Court's 4:3 majority judgement in Commissioner of Taxation v PepsiCo, Inc [2025] HCA 30 (PepsiCo) brings to an end one of the more significant Australian income tax disputes in recent times, and addresses a number of important and fundamental concepts for multinationals.
In finding in favour of the taxpayer in the long running, embedded royalty dispute against the Commissioner of Taxation (Commissioner), and in considering what constitutes an embedded royalty for tax purposes, the High Court clarified the concept of consideration for the use of intangible assets. It also provided definitive guidance on the interpretation and application of Australia's diverted profits tax (DPT) and general anti-avoidance provisions.
As foreshadowed in PepsiCo case comes to an end: High Court calls last drinks and closes the bar, the decision is significant for several reasons. It carries with it many implications extending beyond the specific fact pattern that was present in PepsiCo.
Key takeaways from Commissioner of Taxation v PepsiCo, Inc
- The High Court reinforced that Australia's royalty
withholding tax provisions are to be applied with close regard to
the objective characterisation of the relevant 'true
contractual arrangements', as well as the importance of
establishing the arm's length, or 'fair', pricing of
the sale of goods, and clearly documenting and establishing the
rationale behind commercial transactions.
- The High Court considered and confirmed the interpretation of
key elements of Part IVA of the Income Tax Assessment Act
1936 (Cth) (ITAA 1936), which will have an
ongoing impact on the application of Australia's anti-avoidance
rules.
- The operation of Australia's DPT provisions have now been considered by Australia's highest court. With the United States previously expressing concerns with diverted profits taxes, following the authoritative guidance now provided by the High Court regarding their interpretation and operation, there will likely be a spotlight on how the Commissioner applies these provisions in the future. This is particularly the case in respect of arrangements involving software and technology, and other intangibles.
The post-PepsiCo world for taxpayers
It may be expected that the ATO's Decision Impact Statement will provide some insights into the Commissioner's views regarding the broader application of the High Court's decision in PepsiCo. We anticipate this will highlight that many aspects of the High Court's analysis and comments relate to the particular facts of PepsiCo. In the meantime, what is known is that the ATO continues to receive significant funding from the Federal Government to conduct its ongoing tax avoidance taskforce activity, a component of which is its regular program of assurance and risk based reviews and audits.
Taxpayers should therefore continue to be proactive and prepared.
In this guide, we delve further into the detail of both the majority and minority judgements of the High Court, and consider what may come next in the context of the vexed question regarding the Commissioner's treatment of royalties and intangibles. We also explore what steps multinationals should take to prepare for ongoing ATO scrutiny.
Download a copy of Commissioner of Taxation v PepsiCo, Inc: a guide to the ongoing implications.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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