iscoverThe High Court of Australia has ruled in favour of PepsiCo, dismissing six appeals brought forward by the Commissioner of Taxation. Here, senior tax lawyers unpack the decision and discuss the implications for tax practitioners moving forward.
Key takeaways from the High Court’s decision in Commissioner of Taxation v PepsiCo
14 August 2025
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10 minute read
The nation’s highest court has, by majority decision, dismissed six appeals from the PepsiCo, Inc. v Commissioner of Taxation [2024] FCAFC 86 decision of the Full Court of the Federal Court of Australia, ruling in favour of the taxpayer.
The High Court, made up of Chief Justice Stephen Gageler and Justices Michelle Gordon, James Edelman, Simon Steward, Jacqueline Gleeson, Jayne Jagot, and Robert Beech-Jones, dismissed each appeal on Wednesday (13 August), via a 4-3 majority decision.
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The appeals were dismissed on the grounds that royalty withholding tax was not payable under s 128B(2B) of the Income Tax Assessment Act 1936 (ITAA) and that PepsiCo and Stokely-Van Camp (SVC) had not obtained a tax benefit, therefore were not liable to pay diverted profits tax (DPT).
As previously reported by Accountants Daily and Accounting Times, this decision came after PepsiCo successfully appealed a Federal Court finding in June 2024, which found that it was liable for royalty withholding tax payments, before the High Court granted the ATO special leave to appeal the reversal in November 2024.
Before it was reversed by the Full Court, PepsiCo was found to be liable for royalty withholding tax because of payments made to bottling company Schweppes Australia under exclusive bottling agreements (EBA) to distribute Pepsi, Mountain Dew, and Gatorade products.
The original grounds of the case brought forward by the Commissioner of Taxation stated that the EBAs were allowed for trademark use, yet PepsiCo and SVC had made no payments for IP rights.
Prior to the decision in favour of PepsiCo, John Ioannou, Macpherson Kelley head of tax, said: “If PepsiCo prevails, it will be a win insofar as offering reliance on well documented, commercially grounded arrangements as a means to legitimately avoid being classified as royalties.”
Once the decision was handed down, Lisa To, Bartier Perry Lawyers partner and head of tax, said it offered vital clarity on the often-complex boundary between payments for goods and intellectual property (IP).
“The Court examined whether the payments made by Schweppes Australia (SAPL) to PepsiCo Beverage Singapore (PBS) included a component that constituted a “royalty” for the use of PepsiCo’s IP. The majority of the High Court affirmed that where goods are sold at a fair, arm’s length price, no part of that payment will be treated as a royalty for embedded intellectual property. The amounts paid by SAPL to PBS for concentrate were not "consideration for" the use of the PepsiCo’s IP,” she said.
“At the same time, the High Court held that payments were received by PBS in its own right, meaning neither PepsiCo nor Stokely-Van Camp derived income that triggered royalty withholding tax or DPT.”
Sue Williamson, Dentons tax partner, echoed these sentiments, noting the decision provided much-need clarity on the treatment of cross-border payments involving IP.
In addition, Williamson said the decision also marked a significant setback for the ATO’s expansive interpretation of royalties and DPT.
“The decision does not stand for the proposition that embedded royalties cannot arise. As always, the outcome turned on the specific facts. That the contracts clearly characterised the payments for goods, not for IP,” she said.
“Branding rights were neither separately granted nor emphasised, and the pricing reflected a bundled transaction for goods. Importantly, the Commissioner had not contended that the price for the concentrate had been inflated to hide a secret royalty outlay.
“The DPT claim failed (by majority) because PepsiCo was able to show that there was no principal purpose of tax avoidance. The decision underscores the importance of commercial rationale in cross-border arrangements and the critical need for evidence to support that rationale. Multinationals should ensure they document robust, non-tax business reasons for their international structures.”
To add that, from this decision, the ATO would maintain close scrutiny on cross-border deals involving embedded IP.
“Tax advisers should proactively review contracts to ensure commercial terms reflect substance. By broadening the definition of ‘royalty’ to include payments for goods bundled with intellectual property, the Court has extended the ATO’s reach beyond multinationals to include SMEs engaged in importing branded products under exclusive supply arrangements,” she said.
Angelina Lagana, Corrs Chambers Westgarth head of tax controversy, also weighed in on the decision and said multinational groups would need to prepare for scrutiny from the ATO.
Lagana attributed this to the fact the ATO had significant funding and would continue to focus on compliance activity such as the deductibility of costs, taxes on royalty payments for the use of intangibles, anti-avoidance considerations related to the movement of intangibles to low-tax jurisdictions and/or arrangements entered into with the primary purpose of avoiding tax, as well as the mischaracterisation of royalty payments.
“Multinationals must prepare for this by reviewing whether any payments they are making are for the use of intangibles, whether their Australian legal advisers have reviewed intercompany contracts with Australian parties from an Australian tax perspective, how payments are characterised (i.e. are they an embedded royalty), and how the ATO might scrutinise their arrangements,” Lagana said.
The full case citation is Commissioner of Taxation v PepsiCo Inc; Commissioner of Taxation v Stokely-Van Camp Inc; Commissioner of Taxation v PepsiCo Inc; Commissioner of Taxation v PepsiCo Inc; Commissioner of Taxation v Stokely-Van Camp Inc; Commissioner of Taxation v Stokely-Van Camp Inc [2025] HCA 30.
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