ATO releases Decision Impact Statement on High Court PepsiCo decision

At a glance

• The ATO has released a Decision Impact Statement (DIS) following the High Court’s decision in Commissioner of Taxation v PepsiCo Inc.
• The DIS states that the outcome in PepsiCo was determined by the particular facts and circumstances of the appeals.
• The ATO makes clear that in their view the decision does not limit the Commissioner’s ability to challenge arrangements involving IP, including where rights are said to be embedded in payments for goods or services.
• The ATO also indicates that it will continue to examine pricing, economic substance and the evidence in cases involving IP.
• The ATO also indicated that the Diverted Profits Tax (DPT) decision was based on the unique facts of the case.

On 19 March 2026, the Australian Taxation Office (ATO) released its Decision Impact Statement (DIS) following the High Court’s decision in Commissioner of Taxation v PepsiCo Inc & Anor [2025] HCA 30. The crux of the DIS is the reliance of the Commissioner on the uniqueness of PepsiCo’s particular facts and circumstances to support the Commissioner continuing to challenge arrangements involving intangibles and intellectual property (IP), including characterisation, embedded royalties, and the application of the anti-avoidance provisions.

Key Highlights

• The DIS emphasises that the outcome in PepsiCo was determined by the particular facts and circumstances of the appeals and should not be read as limiting the Commissioner’s ability to challenge arrangements involving IP and intangibles.
• The DIS maintains that royalty characterisation remains a question to be determined by the proper construction of the relevant arrangements and what the parties have, in substance, agreed. Contractual labels are not determinative.
• The DIS also states that the ATO will continue to examine characterisation of payments (whether involving arm’s length parties or related parties) and will particularly examine related party arrangements closely.
• The DIS further states that in the determination of key concepts of ‘consideration’ and the ‘agreement’, it is appropriate to take a broad view. As such, a relevant agreement may comprise a composite of contracts and dealings, rather than a single written instrument. The ATO also highlight that the High Court did not endorse any “central bargain” or “central transaction” test for royalty characterisation.
• It is clear the ATO maintains that PepsiCo does not disturb its position that royalties may, on the facts of a particular case, be embedded in payments described as being for goods or services.
• In relation to the Diverted Profits Tax (DPT), the ATO states that the finding that the DPT did not apply was based on critical facts which were unique to PepsiCo and would have limited application in other cases. However, the ATO state that the DPT decision does raise some broader technical issues for DPT and Part IVA (“PIVA”) which may require judicial clarification.