On 13 August 2025, the High Court of Australia handed down its landmark decision in PepsiCo Inc v Commissioner of Taxation [2025] HCA 30. MinterEllison represented the Commissioner of Taxation in this significant matter. The heart of the dispute was whether payments made by Schweppes Australia Pty Ltd (SAPL), an Australian company authorised to 'bottle, sell and distribute' beverages to PepsiCo Beverage Singapore Pty Ltd (PBS ) for beverage concentrate:

• included a royalty for the use of PepsiCo's intellectual property, which would attract royalty withholding tax under s 128B(2B) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936); or
• alternatively, whether diverted profits tax (DPT) was payable under s 177P in Part IVA of the ITAA 1936.

The majority (Gordon, Edelman, Steward and Gleeson JJ) held that while SAPL did obtain a licence to use the PepsiCo IP, no part of the concentrate price constituted consideration for that licence. The majority also held that the DPT was not payable.

While the minority (Gageler CJ, Jagot and Beech-Jones JJ) also concluded the royalty withholding tax provisions would have not applied, it did find that the DPT provisions should have applied.

This decision has broad implications for taxpayers, particularly multinational enterprises operating under complex distribution and licensing structures. Ultimately, the PepsiCo proceeding turns on unique facts despite the High Court providing helpful guidance to taxpayers.

Background

PepsiCo Inc and its affiliate Stokely-Van Camp Inc (SVC), both US entities, entered into Exclusive Bottling Appointments (EBA) with SAPL, granting SAPL the exclusive rights to manufacture, bottle, sell, and distribute beverages such as Pepsi, Mountain Dew, and Gatorade in Australia. As a part of the transaction other agreements were entered into such as marketing and performance agreements.

The EBAs under which payments were made under included a grant by PepsiCo/SVC to the Bottler for the right to use trademarks and other IP associated with the beverages, including the bottle and can designs. However, the EBAs did not include a provision for a payment to be made by the bottler to PepsiCo/SVC by way of a royalty for the use of trade marks.

The issues before the court

Royalty Withholding Tax

Whether the payments made by SAPL to PBS for beverage concentrate—either in full or in part—should be characterised as royalties pursuant to its definition in s 6(1) of the Income Tax Assessment Act 1936 (Cth). This issue was analysed in two parts:

1. Characterisation of the payment: was any portion of the payment made by SAPL to PBS properly regarded as “consideration for” the use of PepsiCo’s intellectual property, thereby falling within the statutory definition of “royalty” under s 6(1)?
2. Derivation of income: if the payment was a royalty, was it “derived by” and “paid or credited” to PepsiCo, such that PepsiCo would be liable for royalty withholding tax under s 128B(2B)?

Diverted Profits Tax (DPT)

Whether PepsiCo and SVC were liable to pay DPT under the relevant provisions in Part IVA. This involved the following two sub-questions:

did PepsiCo obtain a "DPT tax benefit" in connection with a scheme within the meaning of s 177J(1)(a); and

even if PepsiCo obtained a tax benefit, was the condition in s 177J(1)(b) regarding "principal purpose" satisfied in relation to the scheme in the relevant year of income?

The outcome

Royalty Withholding Tax

The High Court held that the payments were not subject to royalty withholding tax under s 128B(2B) of the Act. The minority found in favour of the Commissioner on 'consideration for', however it found for the taxpayer on the question of derivation.

Diverted Profits Tax

Although the minority has allowed the Commissioner's appeal based on the application of the DPT provisions, the majority concluded that the DPT provisions were not engaged, because:

• PepsiCo and SVC did not obtain a 'DPT tax benefit' within the meaning of s 177J(1)(a); and
• it could not be concluded that PepsiCo had a principal purpose of obtaining a tax benefit.

Key takeaways

Royalty Withholding Tax

Strict construction of the underlying agreements is preferred in identifying what payments are “in consideration for”:

• the critical inquiry was what the parties had agreed to, ascertained objectively; and
• the majority considered it significant that the agreements had been bargained for at arm's length by unrelated parties.

Consideration for use of intellectual property in this matter was found in both monetary and non-monetary undertakings:

• The Court affirmed that consideration for IP can consist of both monetary and non-monetary undertakings, such as performance obligations under a bottling agreement.
• These undertakings were held to be not incidental—they were integral to the commercial arrangement and contributed to the enhancement of PepsiCo’s brand value in the Australian market.

Text and operation of agreements are central to determining who derives income:

• The Court found no antecedent monetary obligation existed from SAPL to PepsiCo. Payments were made to PBS under separate contracts for the sale of concentrate.
• The Court clarified that a direction to pay a third party does not constitute a payment to the original party unless there is a pre-existing obligation to pay that original party.

Diverted profits tax

Ascertaining whether a DPT tax benefit exists critically turns on reasonable alternative postulates

• The majority stated that there can be no relevant 'tax benefit' where there is no postulate that is a reasonable alternative to the scheme.

• Whilst the majority accepted that it was not enough for a taxpayer to merely demonstrate that the postulate relied upon by the Commissioner was unreasonable, they concluded that 'in unusual cases, a taxpayer may demonstrate the absence of a tax benefit by establishing that there is no postulate that is a reasonable postulate to entering into or carrying out the scheme' ([212]).
• The majority, considering the application of s 177CB and the requirement for a reasonable alternative postulate to accord with the economic substance of the scheme / transaction, found that there was in this case no reasonable alternative to the transaction entered into by PepsiCo. This conclusion stemmed from the majority finding that the monetary consideration paid for concentrate (and not anything else, such as IP licensed by PepsiCo) was the substance of the transaction.
• The minority endorsed Colvin J's approach in his Full Federal Court dissenting judgment, agreeing that but for the schemes, the EBAs would have had a royalty carve-out to be paid to PepsiCo or SVC. This, the minority concluded, 'accords with the commercial and economic essence of the schemes' ([95]).

"principal purpose" considerations

• The majority did not consider that the requisite principal purpose was found having regard to the facts of the case. This was based on the following reasoning:
  • the scheme was the product of arm's length negotiation between unrelated parties;
  • the price payable for the concentrate was not disproportionately high; and
  • the Scheme was in line with the franchise-owned bottling operation (FOBO) model which PepsiCo had adopted since the early 1990s.
• The minority adopted a different approach agreeing with the primary judge and Colvin J at the Full Court level that there was no detailed evidence as to why the existing pricing structure was adopted in the agreements and there would have been a change in financial position resulting from the scheme including US tax which supported the principal purpose finding.
• The majority found that there was no disconnect between the form and the substance of the arrangement. In line with their construction of the agreements, the contractual arrangement included the promise to purchase concentrate, as well as the IP rights. However, the IP rights were not conferred "for nothing" ([216]). Rather, in exchange, PepsiCo obtain the promise by SAPL to build the PepsiCo brands. PepsiCo IP was essential for this.
• The minority on the other hand found that there was a disconnect between form and substance as the payments made by SAPL were for concentrate alone but in substance were for both the concentrate and the IP.

Impact and implications

This decision has broad implications for taxpayers, particularly multinational enterprises operating under complex distribution and licensing structures. Ultimately, however, the PepsiCo decision turns on the taxpayer's specific facts notwithstanding the High Court providing helpful guidance to taxpayers.

Some key implications of the decision include:

• The application of the royalty withholding tax provisions requires close consideration of key concepts "consideration for", "paid to" and "derivation". The decision of the High Court majority means a strict contractual analysis is necessary when determining whether any part of a payment is truly “consideration for” intellectual property.
• The Court has confirmed that it is not enough to show that the alternative postulates or counterfactuals the ATO puts forward are unreasonable. However, the majority judgment has clarified that taxpayers are not necessarily required to put forward a counterfactual that produces no tax benefit in order to succeed.

The substance of the transaction / scheme will be a critical constraint to identifying a reasonable counterfactual. From a practical perspective, multinationals with cross border arrangements involving intangibles, such as royalty free licences, should continue to review their Australian taxation positions in light of this decision.