PepsiCo Faces Royalty Tax Ruling in Australia
PepsiCo is under increasing financial pressure in Australia after the nation’s High Court declined to hear the company’s appeal against a Federal Court ruling concerning transfer pricing and royalty payments. The decision clears the way for the Australian Taxation Office (ATO) to enforce adjusted tax liabilities relating to trademark royalties paid by PepsiCo’s Australian bottler.
At the center of the case is the ATO’s assertion that PepsiCo should have reported higher taxable income in Australia, due to the royalty payments made to its U.S. parent for the use of PepsiCo intellectual property. Although PepsiCo does not directly operate in Australia, it licenses intellectual property—including branding—to its affiliate, PepsiCo Australia Holdings (PAH), which in turn operates a bottling business through third-party arrangements with its subsidiary, Schweppes Australia.
The Federal Court concluded that PepsiCo had underreported income by failing to include intangible-related profits, asserting that the royalty rate charged by the U.S. entity was not in line with arm’s length standards. The court further ruled that the ATO was within its rights to deny deductions for part of the royalty payments made in 2010 and 2011, resulting in a significant tax liability for PepsiCo.
The High Court’s refusal to review the case now affirms the ATO’s broader stance on transfer pricing enforcement involving intangible assets—an area of growing focus among global tax authorities. FMCG multinationals with cross-border licensing arrangements face increased scrutiny over compliance with arm’s length pricing of royalties and service fees.
This ruling serves as a key precedent for other multinational companies navigating Australia’s stringent transfer pricing landscape. With the ATO actively targeting profit shifting through intellectual property arrangements, FMCG businesses operating under global brand licensing models may need to reassess existing structures to mitigate future tax exposure.
The case exemplifies a broader trend of tax authorities clamping down on the use of IP-related transactions to shift profits offshore, reinforcing the need for documented economic substance in intra-group licensing deals.