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PepsiCo wins high stakes appeal – Shaun Cartoon outlines the implications in Bloomberg international business bulletin

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Writing for Bloomberg Industry Group’s international tax news bulletin, Shaun argues that the recent decision by the Full Federal Court of Australia to absolve PepsiCo Inc. from its royalty withholding tax liability has cast doubt on the Australian Taxation Office’s position on “embedded royalties”.

“A lower court’s decision in the case late last year made waves around the world by finding that Schweppes Australia Pty Ltd.’s payments for concentrate from PepsiCo Beverage Singapore Pty Ltd. included an embedded royalty for an exclusive license to use intellectual property granted to Schweppes by PepsiCo,” Shaun explained. “While the Federal Court ruling gives a reprieve to large multinationals operating and investing in the country, it likely won’t impact the ATO’s continued scrutiny of their tax arrangements as the regulator considers an appeal to the High Court.

“The decision is the latest in a string of Federal Court judgments that have found for the taxpayer, respecting the underlying commercial drivers and agreements struck between arm’s-length parties. It’s a wake-up call to the ATO that it can’t imply a commercial arrangement is a sham without making the allegation directly.” However, Shaun views it as a “speed bump” for the ATO, which is unlikely to divert it from its goals.

“The ATO likely will continue to scrutinize arrangements involving large multinationals, with a range of weapons in its arsenal such as Australia’s transfer pricing framework and general anti-avoidance rules.”

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