In brief
On 13 August 2025, the High Court of Australia handed down its much-anticipated decision in Commissioner of Taxation v. PepsiCo, Inc. [2025] HCA 30.
By a majority of 4-3, the High Court found in favour of the taxpayer and dismissed each appeal by the Commissioner of Taxation. In this regard, the majority decision concluded that:
- No royalty withholding tax arose; and
- No Diverted Profits Tax (DPT) applied,
to the circumstances involving the inbound supply chain for PepsiCo’s concentrate and arrangements with third party bottlers in Australia.
Key takeaways
- The inbound supply chain into Australia and the contractual terms of the arrangements were respected. On a proper construction of the agreements, the payments made were for the concentrate only and did not include any component which was a royalty for the use of intellectual property.
- There was firm confirmation from the Court that although no part of the payment for the concentrate was payment for a license to use PepsiCo’s Intellectual Property, the Bottler did not obtain the license for nothing. The right to use was part of a comprehensive commercial arrangement of which an essential element obliged the Bottler to advertise the Beverages and engage in sales promotion activities. This agreement on the Bottler’s part had real value to PepsiCo. This was essentially non-monetary consideration in exchange for the grant of the use of intellectual property (e.g., marketing) which ultimately benefited PepsiCo as the owner of that intellectual property.
- The Court unanimously held that any payment was not paid or credited to or derived by PepsiCo in the US and therefore no royalty withholding tax was payable.
- By majority, the Court also held that PepsiCo did not obtain a tax benefit and did not have to pay DPT. In this context, the onus put on the taxpayer was clarified by the Court. The Court held that it does not follow that the only way a taxpayer can discharge its onus of proof in the DPT is to lead evidence of another reasonable postulate in which the taxpayer obtains no tax benefit. This was important for PepsiCo because it was strong in its defence to the DPT that no other alternative postulate (or counterfactual) existed to its inbound supply chain into Australia, being the sale of concentrate to a bottler (by its nominated subsidiary) for a price and the granting of an Intellectual Property license for no monetary consideration (which was supported by many years of consistently applying its model).
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