At issue was the “royalty-free” use of intangible assets under an agreement whereby PepsiCo’s Singapore affiliate sold concentrate to Schweppes Australia, which then bottled and sold PepsiCo soft drinks for the Australian market. As no royalties were paid under the agreement, no withholding tax was paid in Australia.
The Australian Taxation Office (ATO) determined that the payments for “concentrate” from Schweppes to PepsiCo had been misclassified and were in part royalty for the use of PepsiCo’s intangibles (trademarks, branding etc.), and an assessment was issued for FY2018 and FY2019 where withholding tax was determined on that basis. The assessment was issued under the Australian diverted profits tax provisions.
The assessment was appealed to the Federal Court in February 2022.
Judgment of the Court
The Federal Court ruled in favor of the tax authorities.
Following the decision of the Court, the ATO issued an announcement concerning the case.
According to the announcement it welcomes the decision.
“This decision confirms PepsiCo, Inc. (Pepsi) is liable for royalty withholding tax and, in the alternative, diverted profits tax would apply. This is the first time a Court has considered the diverted profits tax – a new tool to ensure multinationals pay the right amount of tax.
Deputy Commissioner Rebecca Saint said this is a landmark decision as it confirms that the diverted profits tax can be an effective tool in the ATO’s arsenal to tackle multinational tax avoidance.
However, the decision may be subject to appeal and therefore, may be subject to further consideration by the Courts in the event of an appeal.
The Tax Avoidance Taskforce has for a number of years been targeting arrangements where royalty withholding tax has not been paid because payments have been mischaracterised, particularly payments for the use of intangible assets, such as trademarks.
The ATO has issued Taxpayer Alert 2018/2 which outlines and puts multinationals on notice about our concerns.
“The Pepsi matter is a lead case for our strategy to target arrangements where royalty withholding tax should have been paid. Whilst there may still be more to play out in this matter, it sends strong signals to other businesses that have similar arrangements to review and consider their tax outcomes.”
Australia vs PepsiCo 2023FCA1490