The Australian Taxation Office released a Decision Impact Statement on 19 March 2025 following the High Court's August 2025 ruling in PepsiCo Inc v Commissioner of Taxation, which found that PepsiCo and Stokely-Van Camp Inc were not liable for royalty withholding tax or diverted profits tax on payments from an Australian bottler.
The Australian Taxation Office (ATO) issued a Decision Impact Statement on 19 March 2025, concerning the High Court ruling in PepsiCo Inc v Commissioner of Taxation, handed down in August 2025.
Summary of decision
The High Court dismissed the Commissioner’s appeal and found that PepsiCo Inc (PepsiCo) and Stokely-Van Camp Inc (the Taxpayers) were not liable to royalty withholding tax nor to diverted profits tax (DPT).
The Court delivered a split decision, with 4 justices (Gordon, Edelman, Steward and Gleeson JJ) delivering the majority judgment (Majority) and 3 justices comprising the minority (Gageler CJ, Jagot and Beech-Jones JJ) (Minority). All legislative references in this Decision impact statement are to the Income Tax Assessment Act 1936.
All judgment references in this Decision impact statement are to the judgment of Commissioner of Taxation v PepsiCo Inc & Anor [2025] HCA 30 (PepsiCo), unless otherwise indicated.
Royalty withholding tax
The Majority found that payments received by an Australian company in the PepsiCo Group from an independent third-party bottler were not made “as consideration for” use of intellectual property and therefore not a royalty for withholding tax purposes. The Minority, in dissent, viewed the payments as containing a royalty.
The Court was unanimous that the payments were not “paid to” or “derived by” the Taxpayers for withholding tax purposes. It followed that there was no royalty withholding tax payable.
Diverted profits tax
The Majority rejected the Commissioner’s alternative argument that the DPT applied, finding that there were no reasonable alternatives to the scheme and therefore no DPT benefit (tax benefit). The Minority, in dissent, considered that the DPT did apply.
Overview of facts
PepsiCo and Stokely-Van Camp Inc are United States-resident companies in the global PepsiCo Group. They own the brands, recipes and trademarks for well-known branded drinks such as Pepsi, Mountain Dew and Gatorade.
The umbrella contract
The Taxpayers each entered into exclusive bottling agreements (EBAs) with Schweppes Australia Pty Ltd (the Bottler), an Australian company outside of the global PepsiCo Group, to manufacture, bottle, and distribute branded drinks in Australia.
The EBAs granted the Bottler exclusive rights to manufacture, bottle and distribute the drinks in Australia and also provided the Bottler with an implied licence from PepsiCo to use trademarks, as well as mixing formulas, and other intellectual property (IP). The EBAs also obliged the Bottler to purchase the flavour concentrate necessary to make the drinks and required the Bottler to maintain quality standards.
The relevant payments being made by the Bottler were expressed in the EBAs as the “price” for flavour concentrate. In one EBA, the payments were expressly labelled as “royalty-free”.
Under the EBAs, the Bottler was able to purchase flavour concentrate from a “seller”. The “seller” under the EBA was identified as the relevant Taxpayer, but they could, and did, nominate another entity within the PepsiCo Group to take on this “seller” role.
Other key contracts
Alongside the EBAs, the Bottler also entered into other agreements with companies in the PepsiCo Group in respect of the marketing of the drinks. These included:
- an agreement which the Bottler entered into with an Irish member of the PepsiCo Group, and
- co-operative annual advertising and marketing agreements which the Bottler entered into with the nominated seller.
Under these additional agreements, the Bottler and members of the PepsiCo Group agreed to share contributions to marketing for the relevant drink brands in Australia.
If a taxpayer underpays their tax because the statement is incorrect, they will not incur penalties or interest on the underpayment, as long as they acted in good faith and reasonably relied on the Decision Impact Statement. Nevertheless, taxpayers are still required to pay the correct amount of tax owed, subject to applicable statutory time limits.
