PepsiCo case comes to an end: High Court calls last drinks and closes the bar

In a much anticipated, eagerly awaited decision, the High Court today, in a 4/3 majority judgement in Commissioner of Taxation v PepsiCo, Inc [2025] HCA 30 (PepsiCo), found in favour of the taxpayer in its long running embedded royalty dispute against the Commissioner of Taxation (Commissioner).

The High Court’s majority decision affirms the Full Federal Court’s majority decision in PepsiCo, Inc v Commissioner of Taxation [2024] FCAFC 86. We have analysed the case in detail in our previous Insights:

• Full Federal Court decision in PepsiCo falls flat for the ATO
  
   
• Commissioner orders one last round in PepsiCo

The High Court majority confirmed each of the following:

• payments made by Schweppes Australia Pty Ltd (Schweppes) under Exclusive Bottling Agreements (EBAs) entered into by Schweppes with both PepsiCo and Stokely-Van Camp, Inc (SVC), did not include a royalty paid as consideration for the use or right to use trademarks and other intellectual property licensed to Schweppes under the EBAs;
  
   
• even if the payments made by Schweppes under the EBAs were found to have included a royalty component, such component was not income derived by, and was not paid to, PepsiCo and SVC, and consequently, was not subject to royalty withholding tax (which was unanimous); and
  
   
• as no royalty withholding tax was payable by PepsiCo or SVC, in the alternative neither PepsiCo or SVC were liable to diverted profits tax (DPT) in respect of the payments under the EBAs.

Significance of the High Court’s PepsiCo decision

The High Court’s majority decision is significant for a number of reasons. It clarifies how commercial contracts should be interpreted. It also resolves perceived ambiguity regarding the way in which Australian courts – and indeed, the Commissioner himself – should assess and determine the reasonableness of possible alternatives to the transactions actually undertaken by taxpayers in commercial circumstances.

In the context of the PepsiCo dispute, the clarification and application of contractual interpretation principles is of specific importance. It has immediate relevance for the way in which Australia’s domestic royalty withholding tax provisions are to be both interpreted and applied. This, in turn, will be an area requiring the Commissioner’s further attention and focus, particularly in respect of commercial arrangements involving the licensing and sub-licensing of software.

In a more general sense, the perceived ambiguity regarding the way in which the ‘alternative postulate’ is to be determined and applied in the broader context of the general anti-avoidance provisions’ operations within Australia’s income tax legislation has been resolved. Importantly, it has implications for a wide range of scenarios beyond just those involving intangibles and intellectual property arrangements.

Ongoing focus on intangible arrangements

It is apparent from the High Court’s decision that the positions of the Australian courts and the Commissioner on these issues are not always aligned. Irrespective of today’s outcome, the Commissioner will continue to be increasingly focused on scrutinising intangible arrangements. Taxpayers should be carefully considering any payments for the use of intangibles and how payments are characterised. It will be interesting to see how the Commissioner will seek to apply, or not apply, the High Court’s decision to other matters involving intangible arrangements – including the finalisation of the Commissioner’s views in Draft Taxation Ruling 2024/D1 Income Tax: royalties — character of payments in respect of software and intellectual property rights. In managing ATO scrutiny, the High Court’s decision highlights the importance of having comprehensive and relevant commercial and economic evidence to support positions taken and commercial decisions made.

As would be expected from such a seminal case, the High Court judgements are detailed, spanning 238 paragraphs across both a majority and a minority judgement. The Corrs teams are analysing the decision in its entirety and will be providing more detailed commentary soon.