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The Tax Office says its victory in the Federal Court should prompt multinationals with similar arrangements to review and reassess.
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ATO wins landmark diverted profits case against Pepsi
04 December 2023
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The ATO has won a legal battle against Pepsi in the first diverted profits tax case in Australia, paving the way for further legal action against aggressive multinational profit-shifting schemes.
The Federal Court on Thursday found that Pepsi’s corporate arrangements between its Australian, Singaporean and American entities helped it avoid withholding tax payments to the Tax Office.
As a result, Pepsi and its subsidiary Stokely-Van Camp were liable to pay millions in tax from royalties received from Schweppes Australia, the local bottler of Pepsi now known as Asahi Beverages, and would have been subject to the diverted profits tax (DPT) in the alternative.
Justice Mark Moshinsky, in a summary statement ahead of the judgement’s full release, found Pepsi contrived an arrangement to produce soft drink concentrate through its Singaporean manufacturer, Concentrate Manufacturing, before supplying it to PepsiCo Beverage Singapore (PBS), which despite its name was an Australian subsidiary.
PBS sold the concentrate to Schweppes Australia for approximately $240 million between the 2018 and 2019 financial years.
However, the court found PBS then “transferred almost all of the money received” to Concentrate Manufacturing, retaining only a “small margin” in return.
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Mr Moshinsky found that payments made by Schweppes were “consideration for the use of, or the right to use, the relevant trademarks and other intellectual property” of Pepsi and Stokely-Van Camp.
“It follows that the payments made were, to an extent, ‘royalties’ and [Pepsi and Stokely-Van Camp] are liable to pay royalty withholding tax at the rate of 5 per cent on those royalties,” he said.
Mr Moshinsky also agreed with the ATO’s argument that if royalty withholding tax did not apply, the diverted profits tax would have applied instead.
“One of the principal purposes of [Pepsi and Stokely-Van Camp] in entering into or carrying out the relevant scheme was to obtain a tax benefit (namely not being liable to pay Australian royalty withholding tax) and to reduce foreign tax (namely, US tax on their income),” he said.
“The Commissioner’s diverted profits tax case is predicated on the royalty withholding tax provisions not applying,” he said. “Had the court not concluded that the royalty withholding tax provisions applied, the court would have concluded that the diverted profits tax provisions apply.”
The government introduced the DPT regime in 2017, applying a 40 per cent penalty to multinationals with annual global incomes of at least $1 billion who shifted profits overseas.
ATO deputy commissioner Rebecca Saint said the Federal Court’s ruling was a “landmark” decision that confirmed the DPT could be an effective tool in the “ATO’s arsenal to tackle multinational tax avoidance”.
“The Pepsi matter is a lead case for our strategy to target arrangements where royalty withholding tax should have been paid.”
While the decision could be subject to an appeal, she said it sent “strong signals to other businesses that have similar arrangements to review and consider their tax outcomes”.
“This outcome was only possible after years of hard work by the talented and dedicated officers in the Tax Avoidance Taskforce,” she said.
The ATO said its taskforce had secured more than $27.7 billion from multinationals since 2016 and changed “the governance and culture around corporate tax”.
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