Global Daily Tax News, Australia Granted Appeal In PepsiCo Case, (Nov 22, 2024)

The Australian Tax Commissioner has been granted special leave to appeal the ruling of the Full Federal Court in respect of the decision in PepsiCo, Inc. v Commissioner of Taxation [2024] FCAFC 86.

The Full Federal Court found that PepsiCo was not liable to royalty withholding tax and that the diverted profits tax (DPT) did not apply.

The case concerned transactions between PepsiCo and an Australian company engaged by it to undertake the bottling and sale of beverages in Australia. The case concerns whether Pepsi is liable for royalty withholding tax in Australia and, in the alternative, diverted profits tax.

PepsiCo entered into exclusive bottling agreements (EBAs) that included a licence of the taxpayers' trademarks and other intellectual property but did not provide for a royalty.

The ruling considered whether, as the Commissioner alleged, the taxpayers were liable to pay royalty withholding tax on part of the payments made by the Bottler under the EBAs – specifically, whether payments made by the Bottler were consideration for the right to use intellectual property.

Further, the case was the first time the court considered the potential application of Australia's diverted profits tax, looking at whether the taxpayers entered into or carried out the scheme for a principal purpose of obtaining a tax benefit and reducing foreign tax liabilities.

As summarized by the Court, under the arrangement, concentrate was produced in Singapore by a subsidiary of PepsiCo; the concentrate was supplied to an Australian subsidiary of PepsiCo; the subsidiary was nominated to be the seller of the concentrate under the EBAs; the Australian subsidiary supplied concentrate to the Bottler and invoiced the Bottler for the concentrate; and the Bottler paid the Australian subsidiary for the concentrate in accordance with those invoices.

According to the Court, the amounts invoiced by the Australian subsidiary to the Bottler for the concentrate reflected the unit prices for concentrate agreed in the EBAs. When the invoices were paid by the Bottler to the Australian subsidiary no part was as monies received on behalf of PepsiCo. Instead, the Australian subsidiary paid an 'arm's length price' to the producer of the concentrate retaining a small margin. Profits on the sale of the concentrate were earned by the manufacturer of the concentrate (another PepsiCo entity, which was incorporated in Singapore). No amounts were paid to PepsiCo or another PepsiCo entity, SVC – both established in the US – even though those parties were the ones granting the right to use the trade marks.

The arrangements by which the Australian subsidiary supplied the concentrate involved direct dealings as between the Australian subsidiary and the Bottler, the Court noted. Those dealings were conducted in a way in which the full amount agreed as the price per unit of concentrate under the terms of the EBA was invoiced by the Australian subsidiary as the price for the supply of the concentrate.

The Full Federal Court has said the payments made by the Bottler to the subsidiary were for concentrate alone and included no royalty component. In particular, it said that the PepsiCo entities based in the US that owned the intellectual property received no income from the sale of concentrate to the Bottler.

The Court further said it was inappropriate to conclude that the US PepsiCo entities would have derived taxable royalties income but for the existence of a scheme intended to avoid tax under the diverted profits tax provisions.