High Court rules in favour of PepsiCo in landmark tax case

PepsiCo successful in High Court ruling

The High Court of Australia, on 13 August 2025, handed down its judgment in respect of the Commissioner of Taxation’s (Commissioner) appeals of the Full Federal Court decision of PepsiCo, Inc v Commissioner of Taxation [2024] FCAFC 86.

In this highly anticipated decision, PepsiCo, Inc (PepsiCo) and Stokely-Van Camp, Inc (SVC) were narrowly successful in a 4:3 split decision.

The majority of the High Court dismissed the Commissioner’s appeals, finding there to be no royalty withholding tax (RWHT) liability and no application of the diverted profits tax (DPT).

Recap of the PepsiCo case

The case concerned whether:

PepsiCo and SVC, both members of the PepsiCo group, were liable to RWHT in respect of payments made by an unrelated third party, Schweppes Australia Pty Ltd (SAPL), to entities associated with PepsiCo in relation to concentrate supplied to SAPL by PepsiCo Beverage Singapore Pty Ltd (PBS) under exclusive bottling agreements (EBAs) during the period 1 July 2017 to 30 June 2019; and
in the alternative (premised on PepsiCo and SVC not being liable to RWHT), the DPT applied.

The key facts of the case are outlined in our previous Tax Now article – Reasons for judgment on PepsiCo case released.

At first instance, the trial judge found that PepsiCo was liable to RWHT.

In the alternative (and on the assumption PepsiCo was not liable to RWHT), it was concluded that the DPT applied.

On appeal, the majority of the Full Federal Court found that PepsiCo was not liable to RWHT, and that the DPT did not apply.

The Commissioner appealed to the High Court on three grounds:

Ground 1: Part of the payments were “consideration for” the use of, or right to use, the PepsiCo intellectual property (IP);

Ground 2: The payments were “paid to” and “derived by” PepsiCo; and

Ground 3: PepsiCo was liable to the DPT.

Royalty Withholding Tax

The majority found that whether the payments from SAPL to PBS were in part "consideration for" the right of SAPL to use the IP turns on the proper construction of the agreement.

That is, did the parties bargain that the payments made by SAPL for concentrate were in part to be a recompense to PepsiCo for the right to use IP?

Importantly, the relevant agreement was determined to be a composite agreement of the various contracts between SAPL and PepsiCo/SVC, of which the EBA formed a part.

It was an agreement that SAPL would manufacture, bottle, sell and distribute the beverages and, to facilitate those functions, PepsiCo licensed SAPL to use the IP.

The majority found that the agreement “constituted a complex exchange of valuable promises”, and the basis that moved PepsiCo to provide the licence for SAPL to use the IP was the performance of monetary and non-monetary undertakings by SAPL.

The terms relating to the payment reflected the bargain made, within the context of the broader exchange of promises, as to “what the prices for concentrate would be and no more”, so that the payment for the concentrate by SAPL to PBS was for the concentrate only.

Hence, the payments made by SAPL to PBS were not consideration for the use of IP, and the Commissioner’s contention that the licence to use the IP was provided for nil consideration was rejected.

In contrast, the dissenting judges found that the contractual scheme involved an exchange of interlocking promises, with the grant of the IP licences being an indivisible part of the transaction.

Therefore, SAPL's payment for the concentrate in part moved the grant of the IP licences.

This question is relevant given the payments in respect of the concentrate were made from SAPL to PBS, an Australian entity.

The majority found that, irrespective of whether the payments were consideration for the use of IP, no part of the payments was “derived by” or “paid or credited” to PepsiCo.

The Court did not accept the Commissioner’s argument that SAPL's liability to make payments was owed at all times to PepsiCo, and that when the payments were made by SAPL to PBS, those payments were made at the direction of PepsiCo.

The Court found that there was no monetary obligation owed by SAPL to PepsiCo. Rather, the monetary obligation was between PBS (as PepsiCo’s nominated seller, and the Australian entity holding title in the concentrate) and SAPL.

The dissenting judgment agreed with the majority on this issue.

Diverted Profits Tax

Was there a tax benefit?

The majority concluded that no tax benefit arose as there was no reasonable alternative postulate to the scheme. In reaching this conclusion, the majority rejected the Commissioner’s submission that in order to discharge its onus PepsiCo had to prove the existence of a reasonable alternative postulate in which it was not liable to pay RWHT. Whilst it was accepted that a taxpayer may more usually demonstrate the absence of a tax benefit by identifying a reasonable alternative postulate, the majority held that “in unusual cases” (such as this one),

“…a taxpayer may demonstrate the absence of a tax benefit by establishing that there is no postulate that is a reasonable alternative to entering into or carrying out the [actual] scheme”.

The majority emphasised the importance of the reasonableness of the alternative postulate being measured, pursuant to subsection 177CB(4) of the Income Tax Assessment Act 1936, by reference to the substance of the scheme.

Critical facts which appeared to influence the majority comprised the following:

the substance of the scheme (as properly construed and characterised) included that the price paid for concentrate was for concentrate and nothing else;
the scheme was a product of arm's length dealings between unrelated parties; and
the absence of a royalty was market standard, and a substantive element of the business model which was adopted by the PepsiCo group (and other beverage competitors).

In contrast, on the basis of their finding that the price for the sale of concentrate included within it a component for the transfer of the IP rights (i.e. the royalty), the dissenting judges concluded that there was a tax benefit (consistent with the reasoning of Colvin J, being the dissenting judge in the Full Federal Court case).

The judges considered that the alternative postulate that, but for the schemes, the EBAs would have provided for the royalty to be paid to PepsiCo, being the holder of the rights to the IP, accorded with the commercial and economic essence of the schemes.

Was the “principal purpose” test satisfied?

This question did not need to be addressed by the majority given the finding of no tax benefit.

However, the majority observed that the composite agreement was a correct and accurate record of the bargain stuck by the parties, which strongly favoured there being no principal purpose of enabling PepsiCo to obtain a tax benefit.

The dissenting judges found that PepsiCo had the requisite principal purpose and agreed with the trial judge’s reasoning, including that there was a disconnect between the form and substance of the arrangements.