Full Federal Court Allows PepsiCo’s Appeal and Reverses Decision to Impose Royalty Withholding Tax and Diverted Profits Tax on “Embedded Royalties”

In PepsiCo, Inc v. Commissioner of Taxation, the Full Federal Court has allowed PepsiCo’s appeal against the decision of Moshinsky J at first instance, ruling that: (i) no portion of payments made to PepsiCo under an Exclusive Bottling Agreement by an unrelated bottler and distributor – for syrup concentrate for manufacturing soft drinks – was a “royalty” for Australian royalty withholding tax (RWHT) purposes and (ii) PepsiCo did not obtain a “tax benefit” by not paying RWHT and therefore was not liable to pay diverted profits tax (DPT). The decisions of the Full Court and the trial judge are the first to consider the Australian tax treatment of “embedded royalties” and the DPT rules (which were introduced in 2017) and include detailed reviews of the tax issues raised by the licensing of valuable trademarks and intellectual property.