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On 26 June 2024 the Full Federal Court handed down its much-anticipated decision in PepsiCo, Inc v Commissioner of Taxation [2024] FCAFC 86.
The decision is a significant development for cross-border payments and the taxation of intangibles more generally, with potential implications for the ATO's draft Taxation Ruling 2024/D1, recently announced (but not yet enacted) measures targeting the mischaracterisation of royalties, and the ATO's focus on intangibles; not to mention that this is the first case considering Australia's Diverted Profits Tax (DPT).
Overturning the first instance decision by Moshinsky J, a majority of the Court (Perram and Jackman JJ; Colvin J dissenting) held that payments by a third party bottler, Schweppes Australia, for the purchase of concentrate from members of the PepsiCo group were not royalties (in part or in whole) as no part of the payments was made in consideration for the use of trade marks or any other form of intellectual property (IP). Further, the Court unanimously held that the payments were not subject to royalty withholding tax under domestic law as the payments were not income derived by PepsiCo.
The majority also held that the DPT did not apply as on the state of the evidence and the terms of the scheme put forward by the Commissioner there was no reasonable alternative postulate to the scheme, and accordingly no tax benefit.
This alert summarises the decision and key implications for topical areas relating to intangibles in the Australian tax landscape.
Click here to read the full alert.
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