High Court’s PepsiCo decision and what it means for cross-border IP payments

On 13 August 2025, the High Court of Australia (Court) delivered its judgment in Commissioner of Taxation v PepsiCo, Inc and Commissioner of Taxation v Stokely-Van Camp, Inc [2025] HCA 30, dismissing the Commissioner’s appeal in a narrow 4–3 majority and finding that neither royalty withholding tax (RWT) nor the diverted profits tax (DPT) applied.

Key takeaways from the High Court decision

• The terms of the contract matters most

Payments made by Schweppes Australia Pty Ltd (SAPL) under its agreements with PepsiCo entities were exclusively for the supply of concentrate and did not encompass any consideration for the use of trademarks or other intellectual property rights. The payment must be shown to be “consideration for” the use of intellectual property (IP) to constitute a “royalty” in accordance with its definition in s 6(1) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936), rather than inferred from the broader commercial context.

• Income Derivation & RWT Liability

Since SAPL paid the Australian subsidiary, PepsiCo Beverage Singapore Pty Ltd (PBS), and not PepsiCo, Inc (PepsiCo) or Stokely-Van Camp, Inc (SVC) directly, the income was not derived by the US entities. A royalty must be “paid or credited” to the non-resident. Hence, Australian RWT did not apply under s 128B of the ITAA 1936.

• Diverted Profits Tax (Part IVA) and the Alternative Postulate

Since no RWT was payable by PepsiCo or SVC, alternatively, neither PepsiCo nor SVC were liable for DPT in relation to the payments made under the EBAs.

Significance and impact

The High Court’s decision marks a pivotal moment in Australia’s approach to cross-border intellectual property arrangements and international tax compliance.

Greater certainty in distribution models using branded products

Following the High Court’s decision, Bartier Perry was contacted by Accountants Daily to provide a quote on the implications of the decision. In this article, we commented that the decision offered greater certainty on the complex boundary between the payment for goods and IP. Please find the link to the article here: Key takeaways from the High Court’s decision in Commissioner of Taxation v PepsiCo | Accountants Daily

The judgment affirms that where a distributor (like Schweppes) purchases branded goods, even if those goods incorporate significant intellectual property (like trademarks or know-how), such payments will not automatically be treated as royalties. Instead, it will depend on the actual terms of the contract, and how payments are structured.

This is particularly relevant for consumer goods companies using local distributors or multinationals with IP centralised offshore or that operate under complex distribution and licensing structures.

Importance of clarity in the contract

The Court’s decision provides protection for well-structured, commercial distribution arrangements where:

• payments are genuinely for goods (not IP)

• no royalty is “paid to” or “derived by” a non-resident

• there is clear evidence of the contractual and economic substance.

However, while this case was favourable to the taxpayer, the above is not a safe harbour. The Court’s analysis was finely balanced. The Court emphasised the importance of contractual clarity and the alignment between legal form and commercial substance.

Where arrangements appear artificial, uncommercial, or lacking internal coherence, the Commissioner of Taxation may still invoke RWT, in accordance with s 128B of ITAA 1936, and DPT, in accordance with Part IVA of the Income Tax Assessment Act 1997 (Cth). 

Taxpayers with similar distribution and licensing structures should ensure that they:

• review their agreements to ensure that payments for goods are clearly distinguished from any IP licences or services

• avoid bundling arrangements where royalty and non-royalty payments are indistinct

• ensure that invoicing, internal documentation, and financial records support the intended treatment.

ATO likely to refocus

Although the Court decided in favour of the taxpayer, the margin (4 to 3) was narrow. The minority judges accepted the Commissioner of Taxation’s arguments on DPT. This suggests that the Commissioner may potentially:

• Continue to challenge embedded royalty arrangements where contracts are unclear.

• Tighten guidance on IP-related payments, particularly in high-risk sectors such as software, digital infrastructure, biotech, and franchising, where value is heavily tied to intellectual property.

Following the Court’s decision, companies will be more exposed to the Australian Taxation Office’s (ATO) scrutiny of transfer pricing arrangements.

The decision gives the ATO legal momentum to challenge aggressive profit shifting by multinationals operating in Australia’s rapidly growing digital infrastructure sector. The ATO is already auditing major multinational tech companies like Google, Amazon, and Microsoft over concerns that profits from Australian data centres are being under-reported locally and shifted offshore, mainly to lower-tax jurisdictions like Singapore. The issue is becoming more critical as cloud and AI services expand, with Australia expecting a $26 billion investment in new data centres by 2030.

• Update or narrow in scope the existing ATO materials such as TR 2024/D1 (Draft Ruling on Software Licensing Arrangements).

If you have any queries regarding the above or if you are entering into any IP related arrangements and require assistance, please contact the writers, Lisa To and Emily Chow.  

Authors: Lisa To & Emily Chow

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.