Embedded Royalties Unbottled: The Australian High Court Decides in PepsiCo Decision

Journal
Rao, B.
Australia
Asia-Pacific Tax Bulletin 2025 (Volume 31), No. 3
FormatPDF
EUR
40
| USD
45
(VAT excl.)

The High Court’s decision in Commissioner of Taxation v. PepsiCo, Inc and Commissioner of Taxation v. Stokely-Van Camp, Inc [2025] HCA 30 provides a definitive statement on the treatment of “embedded royalties” and the application of Australia’s diverted profits tax (DPT) to cross-border IP arrangements. In a narrow 4:3 split, the High Court upheld the Full Federal Court’s finding that payments for beverage concentrate under exclusive bottling agreements did not include a royalty component and were not derived by the US IP owners. The ruling emphasizes objective contractual construction in its commercial context, including the role of non-monetary consideration, and the evidentiary burden in anti-avoidance contexts. This article examines the factual background, the Court’s reasoning, and the implications for multinational enterprises, with particular reference to the ATO’s draft guidance in TR 2024/D1 and PCG 2025/D4.