Australia: ATO impact statement on High Court decision holding taxpayer not liable for withholding tax on embedded royalties or subject to DPT
Statement open for comment until May 1, 2026
The Australian Taxation Office (ATO) published its decision impact statement on the landmark High Court decision in Commissioner of Taxation v. PepsiCo Inc & Anor [2025] HCA 30, in which the court held in a 4:3 split decision 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 tax authority’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 an “embedded 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.
The ATO stated that the court’s decision did not disturb its view that a royalty may be “embedded” into amounts labeled as consideration for goods or services other than IP, and that it will continue to examine the arrangements of related parties closely. The ATO also stated that the court’s conclusion that no part of the payments were “derived by” or “paid or credited” to the taxpayer was a conclusion was based on factual findings in the particular case, and that it does not expect a scenario in which a royalty is present but not being paid to or at the direction of the provider of the relevant IP to be common. Likewise, the ATO stated that the court’s holding that DPT did not apply was based on several critical and unique facts of the case, which it expects to the uncommon in other cases.
The DIS is open for comment until May 1, 2026.
KPMG observation
It is clear from its statement that the ATO will continue to focus on cross-border IP arrangements—on royalty withholding tax, anti-avoidance, and transfer pricing grounds—and there appears to be no substantive departure from its existing overall approach.
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