PepsiCo Wins High Court Case: No Royalty Withholding Tax in Licensing Arrangement
In one of the most significant tax decisions in recent years, the High Court of Australia has ruled in favour of PepsiCo, confirming that no royalty withholding tax (WHT) applied to payments under its licensing arrangement with Schweppes Australia.
The case offers critical insights for businesses that license intellectual property (IP) or operate under complex cross-border arrangements.
What Was the Case About?
The case arose from a long-standing arrangement between PepsiCo Inc (US) and Schweppes Australia Pty Ltd (SAPL), an unrelated bottler in Australia. Under an Exclusive Bottling Agreement (EBA), SAPL agreed to buy flavour concentrate (used to make PepsiCo beverages) and received a licence to use PepsiCo’s trademarks and IP.
The payments, however, were made not to PepsiCo directly—but to an Australian-incorporated subsidiary, PepsiCo Beverage Singapore Pty Ltd (PBS). Importantly, SAPL made no direct royalty payments to PepsiCo.
The Key Tax Issues
The Commissioner of Taxation argued that part of the payments from SAPL to PBS were, in substance, royalties for the use of PepsiCo’s IP—meaning PepsiCo should be subject to royalty withholding tax and Diverted Profits Tax (DPT).
The Court was asked to consider two main questions:
- Were the payments made by SAPL “consideration for” the use of IP and thus classified as royalties?
- If so, were those royalties “paid or credited to” and “derived by” PepsiCo?
What Did the High Court Decide?
The High Court unanimously agreed that no royalty WHT liability arose, though the judges were split (4:3) on whether the DPT applied.
The Majority View:
- There were two separate arrangements:
- One for the licensing of IP (EBA)
- One for the sale of concentrate
- Payments from SAPL to PBS were only for the concentrate, not for the IP.
- The licensing was part of a broader commercial agreement—but PepsiCo’s compensation came through various undertakings, not via royalties.
If the price paid for the concentrate is reasonable and at arm’s length, the Court held, it should not be split into parts—some of which are labelled as royalties.
The Minority View:
- The whole arrangement was seen as a single, indivisible transaction.
- IP licensing and concentrate sales were intertwined.
- As such, a portion of payments should be treated as royalties.
Still, both sides agreed PepsiCo did not derive or receive any royalty payments, which sealed the outcome.
Why This Case Matters
This decision sets a clear precedent for how commercial licensing and supply arrangements involving IP are characterised for tax purposes in Australia.
Key takeaways:
- Payments made under integrated commercial arrangements won’t necessarily be reclassified as royalties—even if IP is involved.
- Proper contractual structuring and arm’s length pricing remain critical.
- The characterisation of arrangements—not just payment flow—can protect against unexpected WHT or DPT liabilities.
NEED HELP?
This article provides general information and should not be considered legal or tax advice. For personalised guidance, please contact our expert team of tax accountants at The Quinn Group by calling 1300 QUINNS (1300 784 667) or +61 2 9223 9166, or submit an online enquiry form to arrange an appointment.
