At issue was the “royalty-free” use of intangible assets under an agreement whereby PepsiCo’s Singapore affiliate sold concentrate to Schweppes Australia, which then bottled and sold PepsiCo soft drinks for the Australian market. As no royalties were paid under the agreement, no withholding tax was paid in Australia. The Australian Taxation Office (ATO) determined that the payments for “concentrate” from Schweppes to PepsiCo had been misclassified and were in part royalty for the use of PepsiCo’s intangibles (trademarks, branding etc.), and an assessment was issued for FY2018 and FY2019 where withholding tax was determined on that basis. The assessment was issued under the Australian diverted profits tax provisions. The assessment was appealed to the Federal Court, which in November 2023 found in favour of the tax authorities. PepsiCo then appealed to the Full Federal Court. Judgment In a split decision, the Full Federal Court overturned the decision of the Federal Court and found in favour of PepsiCo. Excerpts “In summary, we conclude that the payments made by the Bottler to the Seller were for concentrate alone and did not include any component which was a royalty for the use of PepsiCo/SVC’s intellectual property. The payments were in no part made in ‘consideration for’ the use of that intellectual property and they did not therefore include a ‘royalty’ within the definition of that term in s 6(1) of the ITAA 1936. Further, the payments were received by the Seller on its own account and they cannot be said to have been paid to PepsiCo/SVC. The Commissioner’s attempts to bring PepsiCo/SVC to tax under s 128B(2B) therefore fails for two interrelated reasons: there was no ‘royalty’ as required by s 128B(2B)(b) and the payments made to the Seller by the Bottler cannot constitute ‘income derived’ by PepsiCo/SVC within the meaning of s 128(2B)(a).” “PepsiCo/SVC’s appeals in the royalty withholding tax proceedings should be allowed, the orders made by the trial judge set aside and in lieu thereof there should be orders setting aside the notices of assessment for royalty withholding tax. The Commissioner’s appeals in the Part IVA proceedings should be dismissed. PepsiCo/SVC should have their costs in both sets of appeals as taxed, assessed or otherwise agreed. The parties should bring in a minute of order giving effect to these conclusions within 14 days.” Click here for translation ...

17 January 2024 the Australian Taxation Office published the final version of its Practical Compliance Guideline PCG 2024/1 Intangibles migration arrangements. The PCG has previously been released in drafts as PCG 2021/D4 and PCG 2023/D2 Intangibles arrangements. The final version sets out ATO’s compliance approach to the tax risks associated with certain cross-border related party intangibles arrangements involving: restructures or changes to arrangements involving intangible assets (referred to as ‘migrations’ in the PCG) the mischaracterisation or non-recognition of Australian activities connected with intangible assets. Changes and additions included in the final version: further clarification of the arrangements in scope exclusion of certain arrangements (‘Excluded Intangibles Arrangement’) from the scope inclusion of a ‘white zone’ for arrangements that have been subject to previous ATO audit or reviews further explaining our compliance approach, including the engagement taxpayers can expect based on the compliance risks associated with an arrangement expanding the guidance allowing taxpayers to group intangible assets or arrangements to make it easier for taxpayers apply the PCG providing more information on the reporting requirements taxpayers can expect to complete the reportable tax position schedule ...

At issue was the “royalty-free” use of intangible assets under an agreement whereby PepsiCo’s Singapore affiliate sold concentrate to Schweppes Australia, which then bottled and sold PepsiCo soft drinks for the Australian market. As no royalties were paid under the agreement, no withholding tax was paid in Australia. The Australian Taxation Office (ATO) determined that the payments for “concentrate” from Schweppes to PepsiCo had been misclassified and were in part royalty for the use of PepsiCo’s intangibles (trademarks, branding etc.), and an assessment was issued for FY2018 and FY2019 where withholding tax was determined on that basis. The assessment was issued under the Australian diverted profits tax provisions. The assessment was appealed to the Federal Court in February 2022. Judgment of the Court The Federal Court ruled in favor of the tax authorities. Following the decision of the Court, the ATO issued an announcement concerning the case. According to the announcement it welcomes the decision. “This decision confirms PepsiCo, Inc. (Pepsi) is liable for royalty withholding tax and, in the alternative, diverted profits tax would apply. This is the first time a Court has considered the diverted profits tax – a new tool to ensure multinationals pay the right amount of tax. Deputy Commissioner Rebecca Saint said this is a landmark decision as it confirms that the diverted profits tax can be an effective tool in the ATO’s arsenal to tackle multinational tax avoidance. However, the decision may be subject to appeal and therefore, may be subject to further consideration by the Courts in the event of an appeal. The Tax Avoidance Taskforce has for a number of years been targeting arrangements where royalty withholding tax has not been paid because payments have been mischaracterised, particularly payments for the use of intangible assets, such as trademarks. The ATO has issued Taxpayer Alert 2018/2 which outlines and puts multinationals on notice about our concerns. “The Pepsi matter is a lead case for our strategy to target arrangements where royalty withholding tax should have been paid. Whilst there may still be more to play out in this matter, it sends strong signals to other businesses that have similar arrangements to review and consider their tax outcomes.” ...

The Australian Taxation Office (ATO) has released a new draft of Compliance Guidelines on Intangible Arrangements, PCG 2023/D2. When finalised, the guidelines will set out the ATO’s compliance approach to the development, use and transfer of intangible assets. The guidelines focus on tax risks associated with the potential application of the transfer pricing provisions, withholding tax provisions, capital gains tax (CGT), capital allowances, the general anti-avoidance rule (GAAR) and the diverted profits tax (DPT). Examples of high-risk intangibles arrangements under the draft guidelines include centralisation of intangible assets bifurcation (separation) of intangible assets non-recognition of local intangible assets and DEMPE activities migration of pre-commercialised intangible assets (HTVI) transfer of intangibles assets to a foreign hybrid entity ...

The Australian Taxation Office (ATO) has issued draft Compliance Guidelines on intangible arrangements, PCG 2021/D4. These Guidelines will (when finalised)  set out the ATO’s compliance approach to international arrangements connected with the development, enhancement, maintenance, protection and exploitation of intangible assets, specifically, the potential application of the transfer pricing, general anti-avoidance rule (GAAR) and the diverted profits tax (DPT) provisions. The capital gains tax and capital allowances provisions will also be discussed in this Guideline where these may be considered alongside, or relevant to, the ATO’s transfer pricing, GAAR or DPT risk assessment. The draft Guidelines sets out ATO’s compliance approach to international arrangements connected with the development, enhancement, maintenance, protection and exploitation (DEMPE) of intangible assets and/or involving a migration of intangible assets. The Guidelines applies to Intangibles Arrangements and focuses on tax risks associated with the potential application of the transfer pricing provisions. It also focuses on other tax risks that may be associated with Intangibles Arrangements, specifically the withholding tax provisions, capital gains tax (CGT), capital allowances, the general anti-avoidance rule (GAAR) and the diverted profits tax (DPT). The Guidelines has been prepared to accompany the release and publication of Taxpayer Alerts TA 2018/2 Mischaracterisation of activities or payments in connection with intangible assets and TA 2020/1 Non-arm’s length arrangements and schemes connected with the development, enhancement, maintenance, protection and exploitation of intangible assets. It is not the intention of the Guidelines to limit, deter or prevent arm’s length dealings involving intangible assets. Rather it is intended that the Guideline will serve as a point of reference and assist in understanding arrangements which is seen as representing a higher risk from a compliance perspective. Examples of high risk arrangements centralisation of intangible assets bifurcation (separation) of intangible assets non-recognition of local intangible assets and DEMPE activities migration of pre-commercialised intangible assets non-arm’s length licence arrangements ...

The ATO is currently reviewing international arrangements that mischaracterise intangible assets[1] and/or activities or conditions connected with intangible assets. The concerns include whether intangible assets have been appropriately recognised for Australian tax purposes and whether Australian royalty withholding tax obligations have been met. Arrangements that allocate all consideration to tangible goods and/or services, arrangements that allocate no consideration to intangible assets, and arrangements that view intangible assets collectively, or conceal intangible assets, may be more likely to result in a mischaracterisation. Where arrangements are between related parties, we are concerned about whether the: amount deducted by the Australian entity under the arrangement meets the arm’s length requirements of the transfer pricing provisions in the taxation law[2] functions performed, assets used and risked assumed by the Australian entity, in connection with the arrangement, are appropriately compensated in accordance with the arm’s length requirements of the transfer pricing provisions in the taxation law. These arrangements typically display most, if not all, of the following features: intangible assets are developed, maintained, protected or owned by an entity located in a foreign jurisdiction (an ‘IP entity’) the Australian entity enters into an arrangement to undertake an activity or a combination of activities the Australian entity requires the use of the relevant intangible assets in order to undertake these activities the Australian entity purchases goods and/or services from an IP entity or a foreign associate of an IP entity in order to undertake these activities the Australian entity agrees to pay an amount, or a series of amounts, to a foreign entity which the Australian entity does not recognise or treat as wholly or partly being for the use of an IP entity’s intangible assets. This Taxpayer Alert (Alert) does not apply to international arrangements which involve an incidental use of an intangible asset. For example, this Alert does not apply to resellers of finished tangible goods where the activity of reselling the goods involves an incidental use of a brand name that appears on the goods and related packaging. Whether a use is incidental in this sense will depend on an analysis of the true relationship and activities of the parties. The fact that an arrangement fails to expressly provide for the use of an intangible asset does not, in itself, determine that a use is incidental ...