Global Daily Tax News, Australia Responds To PepsiCo Transfer Pricing, DPT Ruling, (Mar 25, 2026)

The Australian Taxation Office has released its response to the ruling from the High Court of Australia in favor of PepsiCo.

In its August 13, 2025, ruling, the High Court confirmed the Full Federal Court's earlier finding – in PepsiCo, Inc. v Commissioner of Taxation [2024] FCAFC 86 – that the group 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 concerned 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.

The Full Federal Court concluded that 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.

The ATO has set out the implications of the ruling in paragraphs 56 to 78 of a newly released Decision impact statement. In particular, the impact statement says the ATO expects conclusions reached by the court regarding the application of the DPT will not broadly apply to other taxpayers' circumstances, noting that the ruling was specific to "critical facts, unique to these appeals" and stating that it does not expect that this set of "unique" and "critical" facts will be common to other cases.

As earlier confirmed by the agency in its immediate response to the ruling, the ATO is reviewing the impact of the decision on Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules, and draft Taxation Ruling TR 2024/D1 Income tax: royalties – character of payments in respect of software and intellectual property rights.