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All eyes on PepsiCo appeal of the Federal Court’s embedded royalties decision

Shaun Cartoon portrait LORES 2024 v2

Commissioned by Bloomberg international business news platform to comment on the appeal by PepsiCo of its “embedded royalties” case, tax partner Shaun Cartoon says revenue collection agencies around the world, as well as executives at multinational companies, are watching with bated breath.

After the company’s loss to the Australian Taxation Office in November, the parties return to the Full Court of the Federal Court of Australia on May 8, where PepsiCo will seek to overturn a ruling over its “royalty-free” agreements with Schweppes Australia Pty Ltd.

The Federal Court ruled late last year that Schweppes Australia, a company contracted to provide bottling services for the US-based PepsiCo group, paid royalties for its exclusive bottling rights to the PepsiCo Group, triggering withholding tax, or in the alternative, the diverted profits tax.

“If the decision is upheld,” Shaun writes, “taxpayers and their advisers can expect the ATO to apply the decision expansively to target other cross-border contracts with embedded royalty arrangements. The decision is sector-agnostic and potentially applies to a range of industries including technology, pharmaceuticals, mining, manufacturing, and retail.

“PepsiCo had little choice but to appeal. Federal Court Justice Mark Moshinsky’s finding that its business model was fundamentally “contrived” was a hammer blow for a company that operates a similar model in more than 100 jurisdictions around the world.”

But for PepsiCo to win, Shaun explains, the company will need to convince the court on both the royalty issue and the diverted profits tax issue. If it succeeds on the royalty issue but not on the diverted profits tax issue on appeal, its tax bill will multiply eight-fold.

To read the Bloomberg article, click here.

Shaun was interviewed about PepsiCo’s loss in the Federal Court on SKY Business: Read more here.

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