PepsiCo v Australia: Implications for Royalty Withholding Tax and Diverted Profits Tax

Case Information:

  • Court: Federal Court of Australia
  • Case No: VID 27 of 2024, VID 28 of 2024, VID 74 of 2024, VID 75 of 2024, VID 76 of 2024, VID 77 of 2024
  • Applicant: PepsiCo, Inc and Stokely-Van Camp, Inc
  • Defendant: Commissioner of Taxation
  • Judgment Date: 26 June 2024

Judgment Summary

The case of PepsiCo, Inc v Commissioner of Taxation involves the Federal Court of Australia addressing the issue of whether PepsiCo and Stokely-Van Camp (SVC) are liable to pay royalty withholding tax under section 128B(2B) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936). If not, the court also considered whether they are liable for diverted profits tax under section 177J of the same Act. This judgment marks the first time section 177J has been considered in litigation.

The key issues were whether payments made by the Bottler to a related entity under exclusive bottling agreements (EBAs) included royalties for the use of trademarks and whether these payments were income derived by PepsiCo, thus subject to royalty withholding tax.

Key Points of the Judgment:


PepsiCo and SVC had entered into exclusive bottling agreements (EBAs) with Schweppes Australia Pty Ltd (the Bottler), which was responsible for bottling and distributing Pepsi, Mountain Dew, and Gatorade in Australia. The EBAs involved the sale of concentrate to the Bottler and included the use of PepsiCo’s trademarks and other intellectual property without explicitly charging a royalty. The Commissioner of Taxation contended that part of the payments made by the Bottler under the EBAs should be considered as royalties, thus subjecting them to royalty withholding tax.

Core Dispute:

The primary dispute was whether the payments made by the Bottler included royalties for the use of PepsiCo’s intellectual property, which would make them subject to royalty withholding tax. If the payments did not constitute royalties, the court needed to determine if the arrangements were a scheme designed to avoid paying taxes, thus invoking the diverted profits tax provisions.

Court Findings:

  1. Royalty Withholding Tax: The court concluded that the payments made by the Bottler to PepsiCo and SVC were for the concentrate alone and did not include any component as royalties for the use of intellectual property. This conclusion was based on the proper construction of the EBAs and the manner in which they were performed.
  2. Diverted Profits Tax: The court also considered whether the arrangements constituted a scheme to avoid tax, thus falling under the diverted profits tax provisions. The court found that there were no reasonable alternatives to the scheme presented by the Commissioner, and therefore, PepsiCo did not obtain a tax benefit that would invoke section 177J.


PepsiCo and SVC’s appeals in the royalty withholding tax proceedings were allowed, setting aside the notices of assessment for royalty withholding tax. The Commissioner’s appeals in the Part IVA proceedings were dismissed. PepsiCo and SVC were awarded costs for both sets of appeals.

Transfer Pricing Method Used:

The judgment does not explicitly outline a specific transfer pricing method the parties use. However, the dispute centres around the characterization of payments under the EBAs, examining whether they included royalties for intellectual property.

Major Issues or Areas of Contention

  • Characterization of Payments: Whether the payments were for the concentrate alone or included a component for using trademarks.
  • Income Derivation: Whether the payments made to the related entity constituted income from PepsiCo.
  • Application of Diverted Profits Tax: Whether the scheme was designed to avoid tax and thus subject to diverted profits tax.

Decision Analysis:

The decision was not entirely unexpected, given the complexity of determining whether payments included royalties. However, the case’s significance lies in its interpretation of the diverted profits tax provisions under section 177J, marking a precedent in Australian tax law.

Significance for Multinationals and Revenue Services:

This decision has profound implications for multinationals and revenue services. It clarifies the application of royalty withholding tax and the diverted profits tax provisions, emphasizing the need for clear and precise structuring of international transactions and agreements. Multinationals must ensure that their EBAs and similar agreements are meticulously drafted to avoid unintended tax liabilities.

Value of Transfer Pricing Expertise

Transfer pricing expertise is crucial in structuring intercompany transactions to ensure compliance with tax regulations and to defend against tax authority challenges. Proper transfer pricing documentation and economic analysis can prevent disputes and potential tax liabilities.

Preventative Measures

To avoid or better manage cases like this, companies should:

  • Implement a proper tax risk management process.
  • Establish a tax steering committee to oversee tax planning and compliance.
  • Ensure clear and precise documentation of intercompany agreements and the nature of payments.
  • Conduct regular transfer pricing reviews and economic analyses to support the characterization of payments.

In Summary

The Federal Court of Australia’s judgment in PepsiCo, Inc v Commissioner of Taxation provides critical insights into the characterization of payments under intercompany agreements and the application of tax laws. It emphasizes the importance of detailed documentation and economic analysis in defending against tax authority challenges and highlights the value of transfer pricing expertise in managing tax risks.

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