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ATO to appeal PepsiCo decision to High Court
The Australian Taxation Office has sought special leave to appeal the recent PepsiCo decision in the High Court of Australia.
Miranda Brownlee
The Tax Office has applied for special leave to the High Court of Australia in respect of a recent decision by the full Federal Court in PepsiCo, Inc. v Commissioner of Taxation [2024] FCAFC 86.
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The full Federal 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 will also defer the finalisation of its draft ruling, TR 2024/D1: Income tax: royalties – character of payments in respect of software and intellectual property rights, pending the outcome of the High Court proceedings.
“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 possible 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The draft guidance is expected to be released in late 2024 for public consultation.
“Taxpayers should also continue to consider Taxpayer Alert 2018/2 that outlines our concerns regarding the mischaracterisation of activities or payments in connection with intangible assets and engage with us on their specific circumstances,” it said.
“The ATO looks forward to greater certainty being provided to the Australian community.”
