High Court Dismisses Commissioner’s Appeal in PepsiCo and Confirms No Royalty Withholding Tax or Diverted Profits Tax Payable on “Embedded Royalties” – The Cola (Royalty, DPT and Transfer Pricing) Wars Continue!

In Commissioner of Taxation v. PepsiCo, Inc., the High Court has dismissed the Commissioner’s appeal and held that no portion of payments to PepsiCo by an unrelated bottler and distributor – to purchase syrup concentrate for manufacturing trademarked soft drinks – was a “royalty” for Australian royalty withholding tax (RWHT) purposes. The High Court, which is Australia’s final court of appeal, also held that PepsiCo did not obtain a “tax benefit” by not paying RWHT and therefore was not liable to pay diverted profits tax (DPT). PepsiCo is the first Australian case to consider the tax treatment of “embedded royalties” and to examine the DPT rules, which were introduced in 2017. The judgments include detailed reviews of the tax issues raised by the licensing of valuable trademarks and intellectual property, and will likely have implications in a number of tax areas involving Australian international taxation. PepsiCo is one of a number of cases around the world currently examining tax issues associated with valuable brands and trademarks owned by soft drink manufacturers.