Pepsi wins High Court tax case
Make us a preferred source
Make us a preferred source on Google
The news: The High Court has found that beverages giant PepsiCo does not have to pay tax of up to $29 million over its bottling arrangement in Australia with Schweppes for Pepsi and Mountain Dew.
The context: In a 4-3 decision on Wednesday, the court said the payments made to Schweppes "were for concentrate only and did not include any component which was a royalty for the use of intellectual property". It noted the multinational did not obtain a tax benefit from any scheme.
The arguments: The tax office claimed the IP was embedded in the fee Schweppes paid not only for bottling rights but also for the syrup concentrate. As PepsiCo is a non-resident, the ATO said it was liable for royalty withholding tax (RWT).
An alternative argument was that the PepsiCo Group was liable for diverted profits tax. The ATO assessed RWT for 2017–18 and 2018–19 at $3.6 million. The diverted profits tax — at 40 times the RWT — was assessed at nearly $29 million for the same period.
Impact: The ATO has been considering applying RWT to software transactions on the basis that such payments are for intellectual property, not services. It could be back to the drawing board.
What they said: The lead judgment of Justices Michelle Gordon, James Edelman, Jacqueline Gleeson and Simon Steward said "the price agreed for concentrate was for concentrate and nothing else" and that agreement "was a correct and accurate record of the bargain ultimately struck by the parties".
They said it followed that the scheme "was not entered into for the principal purpose of enabling PepsiCo to obtain the tax benefit".
Chief Justice Stephen Gageler, Justice Jayne Jagot and Justice Robert Beech-Jones dissented. They said the payments said to be for the concentrate "were, to some extent, consideration for the intellectual property licences".
Corrs Chambers Westgarth said the decision was "significant for a number of reasons. It clarifies how commercial contracts should be interpreted. It also resolves perceived ambiguity regarding the way in which Australian courts – and indeed, the Commissioner himself – should assess and determine the reasonableness of possible alternatives to the transactions actually undertaken by taxpayers in commercial circumstances".
