In a segment broadcast on last Sunday’s edition of Business Weekend, tax partner Shaun Cartoon explained some of the finer details of a landmark ruling by the federal court 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.
The result of an appeal filed by PepsiCo in January carries major potential implications for companies across the economy.
“The Tax Commissioner’s starting point was that there was an embedded royalty which ought to have been subject to royalty withholding tax,” Shaun told SKY business editor Ross Greenwood. “His backup argument was that, if the arrangement escaped withholding tax, he would come over the top with the diverted profits tax.”
As ABL’s tax team outlined in an article published last month, PepsiCo and Stokely-Van Camp, both part of the PepsiCo Group, entered exclusive bottling agreements with Schweppes Australia Pty Ltd, through which PepsiCo and SVC sold concentrate to Schweppes for the production of beverages in Australia.
The agreements also granted Schweppes the right to use in Australia, trademarks (such as the Pepsi, Mountain Dew and Gatorade brands) and other intellectual property to sell and distribute finished beverage products in the relevant branded PepsiCo packaging in Australia. While the agreements outlined the purchase price for the concentrate, it did not explicitly mention payment for the use of the PepsiCo Group's trademarks and other IP.
“Ultimately, the court decided that the contract between Schweppes and Pepsi was contrived, in that the payments which were ostensibly just for the concentrate were actually, in substance, payments for the concentrate and the valuable IP,” Shaun told SKY.
“While the appeal decision will be sector agnostic, it will potentially apply to large technology companies, use of software, pharmaceuticals, life sciences, consumer brands - it's very very broad.”
To watch the broadcast, click here.
To read the ABL tax team’s article on the PepsiCo decision, click here.
