ATO granted special leave to appeal PepsiCo decision in High Court
The High Court of Australia has given the ATO special leave to appeal the PepsiCo decision relating to royalty withholding tax and diverted profits tax.
The Australian Taxation Office (ATO) has been granted special leave by the High Court of Australia to appeal the Full Federal Court’s decision on PepsiCo, Inc. v Commissioner of Taxation [2024] FCAFC 86.
In the Full Federal Court decision, the court ruled in favour of PepsiCo, finding that PepsiCo was not liable to royalty withholding tax and that diverted profits tax (DPT) did not apply.
The decision reversed a previous finding by the Federal Court that PepsiCo was 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 EBAs allowed for trademark use but no payments were made by PepsiCo and packing company Stokely-Van Camp (SVC) for intellectual property rights, which was at the heart of the case originally brought by the Commissioner of Taxation.
The Full Federal Court stated that because payments did not include an element for the licence to use trademarks or other intellectual property, they were not royalties within the meaning of the Income Tax Assessment Act 1936.
The ATO previously stated that it will finalise its draft ruling, TR 2024/D1: Income tax: royalties - character of payments in respect of software and intellectual property rights, once the High Court has handed down its decision on the case.
“The view in the draft ruling remains our considered view in relation to software arrangements,” the Tax Office said.
“However, the ATO sees that there is benefit in deferring finalisation of the ruling pending consideration by the High Court of related matters in PepsiCo. This will ensure that the ATO can assess the effect, if any, of any High Court reasoning on software arrangements.”
The ATO said it will continue to work on developing practical guidance on how the view in TR 2024/D1 may affect taxpayers.
The draft guidance is expected to be released in late 2024 for public consultation.
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