ATO issues its decision impact statement in PepsiCo

On 19 March 2026, the Australian Taxation Office (ATO) released its Decision Impact Statement (DIS).

This was following the High Court of Australia’s (HCA) 4:3 decision in Commissioner of Taxation v PepsiCo Inc & Anor [2025] HCA 30 (PepsiCo). 

In its decision, the HCA dismissed the Commissioner’s appeal and held that the taxpayers were not liable to royalty withholding tax (RWT) or subject to diverted profits tax (DPT) in respect of payments made under certain exclusive bottling arrangements (for a full detailed breakdown of the HCA Decision and a summary of the case history please see attached our detailed analysis here). 

While the taxpayer were successful in PepsiCo, the DIS makes clear that the ATO views the outcome as highly fact specific and does not regard the decision as limiting its ability to challenge intellectual property (IP) arrangements in future cases. This mirrors the ATO’s consistent approach in other recent Decision Impact Statements, where the Commissioner has sought to confine adverse outcomes to their particular facts while signalling continued scrutiny of similar arrangements. The manner in which the DIS has been drafted may portend what is to come in the ATO’s finalisation of relevant administrative positions such as Draft Taxation Ruling TR 2024/D1 Income tax: royalties – character of payments in respect of software and intellectual property rights. 

We have distilled a summary of the two key issues from the DIS, the ATO’s views and what taxpayers should consider: 

Are the ATO done with embedded royalties?

A central theme of the DIS is that the decision does not displace the ATO’s long standing view that royalties may be embedded in payments labelled as consideration for goods or services. 

In PepsiCo, the majority found that payments made by Schweppes Australia for beverage concentrate were consideration solely for the concentrate, and did not include a royalty for the use of trademarks or other IP. 

The ATO accepts this outcome but emphasises that it turned on the specific contractual structure, payment flows and factual findings in this case. The ATO reiterates in the DIS that:

• contractual labels are not determinative; and
• the correct characterisation depends on identifying the totality of the relevant bargain and what the parties have agreed in substance, not merely form. 

The DIS also expressly states that the relevant ‘agreement’ to be analysed is not confined to a single written contract and may comprise a composite of contracts, arrangements and dealings, affirming that the ATO will “continue to seek to obtain and documents and information necessary to understand the nature of the arrangements between the parties and their associates”. This statement is potentially at odds with the objective approach advocated by the HCA. The DIS also affirms  that “consideration” should not be given a narrow or technical meaning, which, welcomingly, resolves a hitherto open question.  

Additionally, it is the ATO’s view that:

“The decision in PepsiCo does not establish any broad proposition that the characterisation of a payment under a contract – whether involving arm's length parties or related parties – can never be challenged.” 

In future cases, the ATO has put taxpayers on notice that they will seek to “test the economic fundamentals of arrangements that involved the provision of IP but where no royalty is recognised”.  

Taxpayers involved in  related party arrangements involving the use of IP, whether paid for or otherwise, should be especially attentive to this warning as there are tools available to the Commissioner to attack such arrangements (e.g., Australia’s transfer pricing regime and the ability of the Commissioner to reconstruct an arrangement) that were not tested in this case. 

Diverted Profits Tax

The HCA also rejected the Commissioner’s DPT assessments, finding that the statutory requirements (including the identification of a tax benefit and a principal purpose of tax avoidance) were not satisfied on the facts. 
Key to coming to this decision was the conclusion that there were no reasonable alternatives (referred to as reasonable alternative postulates) to the arrangement entered into by PepsiCo. The Court noted that this was an “unusual” outcome. 

Given this unusual scenario, it is worth noting that the ATO does not expect that a similar set of 'unique' and 'critical' facts will arise in other cases, notwithstanding its acknowledgment that the “the scheme was the implementation of a long-standing ‘market standard’ business model’. 

On the other hand, the ATO does highlight several key matters that taxpayers should note: 

(a)    The Court unanimously found that the burden of proof in Part IVA matters and, by extension, the DPT, falls on the taxpayer. For example, when considering alternatives to a scheme, the taxpayer must be able to show how and why an alternative was not reasonable rather than simply trying to show that a postulate put forward by the Commissioner is not reasonable.

(b)    One issue that the ATO sets out in the DIS is the possibility that there may be one or more reasonable alternative postulates to a scheme that may need to be considered. This was also observed by the Court which contemplated the possibility of the number of postulates that could be reasonable and would therefore be required to be addressed by a Taxpayer.

This raises a question: What happens where there are two reasonable alternative postulates and one identifies a tax benefit but the other does not?  

The ATO notes that this matter is raised in the special leave application currently before the HCA in relation to Commissioner of Taxation v Hicks [2025] FCAFC 171.

(c)    It was the view of the majority in PepsiCo that the Commissioner’s alternative postulates were not reasonable, as the economic substance of the proposed alternatives would have varied significantly to the desired commercial outcomes of the actual arrangement entered into in PepsiCo.

The ATO notes that the decision should not be taken to mean that the exact commercial outcomes of an arrangement must be mirrored in an alternative postulate for that postulate to be considered to be reasonable. 

What does the DIS mean for taxpayers?

All taxpayers, but more especially distributors and manufacturers, that have international transactions involving IP, embedded or otherwise, should be reviewing their arrangements and have robust, defensible positions for their arrangements. This  would include having documentation that can support the following: 

• The contractual terms and conditions of the arrangement and showing how those terms and conditions align with the substance of the arrangement.
• What rights are expressly or implicitly provided in relation to a cross-border arrangement.
• What reasonable alternatives there were to the chosen arrangement and why they were rejected.
• In the context of a related party arrangement, the arrangement entered into by unrelated parties that is used in support of the pricing of the arrangement entered into by the taxpayer, as aligned to the OECD’s five comparability factors.

In light of the DIS, taxpayers should also expect continued ATO focus on the interaction between royalty characterisation, transfer pricing outcomes and Part IVA, particularly in relation to related party IP and digital or software based distribution models.
 

FOR MORE INFORMATION

If you would like to learn more about the topics discussed in this article, please contact your local RSM office.