Australian High Court denies Tax Commissioner's appeal in case involving PepsiCo
The High Court of Australia recently delivered a significant ruling in the case Commissioner of Taxation v PepsiCo, Inc. This decision is expected to influence the Australian Taxation Office (ATO) in finalising draft TR 2024/D1 and its administration of arrangements involving intangibles.
In the case, the High Court clarified that no portion of the payment made was a royalty, and royalty withholding tax did not apply. The majority found that the diverted profits tax did not apply as there was no tax benefit.
The ruling was based on "critical facts, unique to these appeals," which included the substance of the scheme indicating that the price paid was only for concentrate, arm's-length dealings between unrelated parties, and the absence of a royalty being market standard.
The Commissioner's counterfactuals were found to be not reasonable as they were not commercially or economically equivalent to the scheme in question. The majority concluded that whether payments for beverage concentrate constituted consideration for the right to use intellectual property turned on the proper construction of the agreements and what the parties had agreed to.
The Court's focus on the terms of the contractual arrangements in determining "consideration" may lead to substantial revision in the current draft view in TR 2024/D1. The ATO immediately issued a media release following the judgment, stating it is considering the impact of the decision on TR 2024/D1.
Entities with similar facts are advised to consult with a knowledgeable tax advisor to determine whether a royalty exists, review applicable arrangements, assess whether the price of goods, services, or underlying arrangements are arm's length, and prepare for and defend an ATO review or audit on intangibles and mischaracterization.
The organization seeking a strategic dispute to test the impact of the High Court's ruling on allocation in related-party cases is PepsiCo. The ATO may seek to strategically litigate another related-party matter on mischaracterization, influenced by the Court's decision.
During the 2022-23 and 2023-24 Federal Budgets, several measures focusing on intangibles were flagged but none have been legislated. The ATO may seek to lobby government for a broader reform agenda to plug any perceived gaps ahead of new rules.
The EBA provided for SAPL to pay only for the concentrate; there was no express provision for the payment of a royalty for the right to use the relevant IP. The High Court's ruling in PepsiCo v Commissioner of Taxation also provided clarity on the onus of proof upon taxpayers in respect of DPT and Part IVA more generally, stating that there is no requirement for a taxpayer to lead evidence of another reasonable alternative postulate to discharge their burden.
The Commissioner issued a diverted profits tax assessment to PepsiCo/SvC, imposing a 40% punitive tax on the challenged royalties. However, the majority found that the diverted profits tax did not apply as there was no tax benefit.
In conclusion, the High Court's ruling in the PepsiCo case has significant implications for the ATO's approach to intangibles and diverted profits tax. Affected entities should seek professional advice to ensure compliance and prepare for potential audits. The ATO may also seek to lobby for broader reforms in the area of intangibles.
