Snapshot
- In the high-profile tax case, the High Court has ruled in favour of PepsiCo, finding no embedded royalty in the concentrate price paid by Schweppes, no diverted profits tax benefit was obtained and no principal purpose of tax avoidance—overturning earlier ATO assessments.
- The majority emphasised arm’s length pricing, genuine commercial arrangements and the allocation of consideration based on actual contractual obligations. The decision limits the ATO’s ability to recharacterise payments as royalties or invoke diverted profits tax without clear evidence.
- The ruling narrows the scope for applying the diverted profits and royalty withholding tax in similar cases, especially where intellectual property rights are bundled with other services. However, it leaves room for future ATO challenges, particularly in related-party or novel business models, and signals potential revisions to ATO guidance and compliance rules.
In our October 2024 LSJ Online article, we discussed the Australian Taxation Office’s (‘ATO’) application for special leave to appeal the PepsiCo case in the High Court, the first case to test the scope and operation of Australia’s enhanced general anti-avoidance rule, the diverted profits tax (‘DPT’). As predicted, special leave was granted and the decision was recently handed down with the majority of the Court finding there was no embedded royalty in the price paid to acquire concentrate, no DPT tax benefit was obtained and, even if a DPT tax benefit was obtained, PepsiCo did not have a principal purpose of obtaining that benefit.
So what can we take from the decision? How broadly applicable are the concepts addressed by the Court likely to be for other taxpayers, both in terms of the technical tax issues and the pervasive issue of contract analysis? More specifically, how will courts characterise and weigh the multitude of rights and obligations arising in complex commercial contracts?
