Australia: Taxpayer not liable for withholding tax on embedded royalties or subject to DPT (High Court decision)
Earlier decision of Full Federal Court affirmed
The High Court on August 13, 2025, found in favor of the taxpayer (4:3 split decision) in the Commissioner of Taxation’s appeal from the earlier judgment of the Full Federal Court in PepsiCo, Inc v. Commissioner that the taxpayer was not liable for withholding tax on embedded royalties and the diverted profits tax (DPT) did not apply.
The court majority rejected the Commissioner’s argument that 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 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 majority also 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 the taxpayer. Finally, the majority concluded that no tax benefit arose as there was no reasonable alternative postulate to the scheme.
Read the court’s judgment
KPMG observation
On the royalty characterization issue, both the majority and dissenting judgments accepted that the third party was granted a right to use valuable IP. However, the majority concluded that the arrangement involved an “exchange of promises” (which involved the conferral of IP rights) that was separate from the agreement for the purchase of concentrate, such that the payment for purchase of concentrate did not constitute a royalty.
The fact that the parties were unrelated appeared to play a significant role in the majority’s reasoning on both the embedded royalties and DPT issues.
For more information, contact a KPMG tax professional in Australia:
Paul Sorrell | psorrell@kpmg.com.au
Jennifer Ta | jta2@kpmg.com.au
Keith Swan | keithswan@kpmg.com.au
Jeremy Capes | jeremycapes@kpmg.com.au