On 26 June, Australia's Full Federal Court decided in favour of Pepsi on appeal, flipping the initial decision which had been in favour of the Australian Taxation Office (ATO). Pepsi won on both issues, being royalty withholding tax and diverted profits tax, meaning it had no tax to pay.
The case concerned the ATO's argument that the payments made by from Schweppes Australia to Pepsi included an embedded royalty. Pepsi sold concentrate to Schweppes, a third party bottler which finished the Pepsi products and sold them to wholesalers and retailers in Australia. The contract between Schweppes and Pepsi stated that the payments made by Schweppes were wholly for the concentrate, with a royalty free license being granted for Schweppes to use Pepsi's IP (e.g. trade marks for labelling).
The decision is important for all multinationals with operations or product sales in Australia. At first blush it is a favourable outcome for taxpayers, but there are important caveats to the decision. Most notably, the court outlined the kinds of situations in which an embedded royalty could be found to arise, as well as the economic analysis which would be required to reach such a conclusion. It also noted that different kinds of IP will influence this economic analysis, whether that be trade marks (as was relevant in Pepsi), patents (as are relevant for the manufacturing and life sciences industries), copyright (as relevant for the tech industry) or some other form of legally protected IP. The deep legal and economic analysis which will be needed will leave multinationals and the ATO with plenty to think about.
More discussion of the appeal decision is contained in our article here. And you can hear more about handling tax disputes in Australia (as well as certain other countries) in this podcast series.