Australia: Taxpayer liable for withholding tax on embedded royalties, application of DPT (Federal Court decision)

The full decision has yet to be made public.

The full decision has yet to be made public.

The Federal Court yesterday held that the taxpayer, an American soft drink company, was liable for royalty withholding tax on payments made by a third party to affiliates of the taxpayer in relation to concentrate supplied to the third party by such affiliates under an exclusive bottling agreement because based on “comparables” relied on by the court, a portion of such payments represented a royalty for the third party's use of or right to use the taxpayer’s trademarks or other intellectual property (IP) relating to the bottling, selling and distributing of beverages under the agreement.

The court was also presented the issue of whether, if the taxpayer were not liable for royalty withholding tax, the diverted profits tax (DPT) would apply. Although the court’s decision rendered that issue moot, the court nonetheless opined that the DPT would have applied on the basis that the taxpayer obtained a tax benefit, there was a "scheme," and a principal purpose of the taxpayer (or its affiliates entities) was to obtain the tax benefit.

The full decision has yet to be made public, with orders in place to remain confidential for a period of seven days, subject to any further order of the Court.

The case is: PepsiCo, Inc v. Commissioner




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