PepsiCo win: High Court dismisses Commissioner of Taxation’s appeal from the Full Federal Court

At a glance

• The High Court dismissed the Commissioner of Taxation’s appeal in the PepsiCo v Commissioner of Taxation royalty withholding tax and diverted profits tax (DPT) case
• The majority of the High Court held that the payments made were for the concentrate only and no part of the payment included any component which was a royalty for the use of intellectual property
• The majority held that the DPT did not apply, as PepsiCo did not obtain a tax benefit in connection with a scheme
• The High Court unanimously held that that any payment made was not "paid or credited" to or "derived by" PepsiCo or SvC and thus royalty withholding tax was not payable
• Landmark judgement on royalty characterisation and the first court case on DPT – but the implications and consequences will be far-reaching

On 13 August 2025, the full bench of the High Court of Australia (High Court) delivered its long anticipated judgement in Commissioner of Taxation v PepsiCo, Inc [2025] HCA 30. The High Court, by majority, found that a royalty did not exist where the agreement did not expressly provide for a royalty. Furthermore, the majority also found that the diverted profits tax (DPT) did not apply as there was no tax benefit.

Key highlights

• The High Court by a majority of 4:3 determined that no portion of the payment made was a royalty and royalty withholding tax (RWHT) did not apply. The decision of the majority turned upon the contractual arrangements: the language used and the underlying obligations.
• The majority concluded that whether payments for concentrate were consideration for the right to use intellectual property (IP) turned on the proper construction of the agreements and what the parties had agreed to. The parties had not bargained that the payments were for IP, and the right to use the IP was part of a comprehensive commercial arrangement and was not obtained “for nothing”. Importantly, the payments were at an arm’s length price.
• In the first High Court decision on the application of the DPT, the majority of 4:3 found that DPT did not apply as there was no tax benefit, with the Commissioner’s counterfactuals found to be not reasonable as they were not commercially or economically equivalent to the scheme in question.
• The conclusion on royalty characterisation will be seen as a ‘common sense’ outcome by many, bringing welcome clarification to an uncertainarea of the law. This is particularly in light of the Australian Tax Office (ATO) guidance products (draft TR 2021/D4 and PCG 2025/D4) which seek to look far beyond the contractual arrangements for the purposes of characterisation.
• The decision also continues the run of judicial clarification on the Part IVA general anti-avoidance rules, bringing more welcome guidance on the onus which taxpayer’s bear when defending against Part IVA and confirming (again) that merely considering the tax impacts of an arrangement does not, of itself, attract those provisions.
• The evident issue is whether, given the PepsiCo, Inc (PepsiCo) case was between unrelated parties, the ATO will seek further strategic litigation to test the extent of the precedence set by the High Court in arrangements involving related parties or will rather seek law reform as the faster avenue to close any perceived gaps.