The Australian Taxation Office (ATO) says a Federal Court decision that PepsiCo is liable for royalty withholding tax is a landmark decision. It was the first time a court had considered the diverted profits tax (DPT) since it was introduced in 2017. PepsiCo may appeal the decision.
The case related to US companies PepsiCo and Stokely-Van Camp (both part of the PepsiCo Group). PepsiCo owns Pepsi and Mountain Dew, and Stokely-Van Camp owns Gatorade.
In 2009, the companies entered exclusive bottling agreements (EBA) with Schweppes Australia, which was owned by Asahi Breweries. As part of the agreements for Schweppes to manufacture, bottle and distribute the beverages, the companies granted Schweppes the necessary trademarks and other intellectual property (IP).
Fast Forward to the relevant period of FY18 and FY19. A Singaporean member of PepsiCo Group, Concentrate Manufacturing (Singapore) (CMSPL) produced concentrate to a formula provided by PepsiCo and Stokely-Van Camp.
CMSPL then supplied the concentrate to PepsiCo Beverage Singapore (PBS), an Australian PepsiCo Group entity.
Under each of the EBAs, the two companies nominated PBS as “seller”, which wasn’t party to the EBA.
PBS supplied the concentrate to Schweppes as “bottler” for payments totalling $240 million during the period in question.
PBS would then transfer the money from Schweppes to CMSPL, less a margin.
The dispute was whether payments made by Schweppes under the EBAs constituted royalties in terms of the royalty withholding tax. Or, if the payments to Schweppes didn’t constitute royalties, then was it a scheme that fell under the diverted profits tax.
Federal Court justice Mark Moshinsky found in favour of the ATO on the royalty withholding tax.
ATO deputy commissioner Rebecca Saint said the decision confirmed that the diverted profits tax can be an effective tool in the ATO’s arsenal to tackle multinational tax avoidance.
“The Pepsi matter is a lead case for our strategy to target arrangements where royalty withholding tax should have been paid. Whilst there may still be more to play out in this matter, it sends strong signals to other businesses that have similar arrangements to review and consider their tax outcomes.
“This outcome was only possible after years of hard work by the talented and dedicated officers in the Tax Avoidance Taskforce,” Saint said.
Saint said that for a number of years, the taskforce had been targeting arrangements where royalty withholding tax has not been paid because payments have been mischaracterised, particularly payments for the use of intangible assets, such as trademarks.
Since 2016, the Tax Avoidance Taskforce have secured more than $27.7 billion in additional tax revenue from multinational enterprises, large public and private businesses (up to 31 August 2023).
