Tax Office’s brawl with big tech faces its first hurdle: Pepsi

The threat of tariff retaliation from US President Donald Trump has not stopped the Australian Tax Office pursuing US tech companies for additional tax on billions of dollars in revenue. But Australia’s High Court might.

The ATO has confirmed that it is still considering a royalty withholding tax (RWT) that would tax billions of dollars worth of software transactions for the first time – largely targeting US tech companies.

US President Donald Trump has backed efforts by US tech giants such as Microsoft.Credit: Bloomberg

The ATO has been developing a new ruling on payments for software, focusing on what it sees as the substance of what consumers pay for: intellectual property.

The problem for foreign tech groups is that this means a royalty withholding tax (RWT) now applies. For US companies, this would mean the payment received from their distributors would attract a 5 per cent tax if it is deemed to be IP-related, not payment for services.

The ATO’s proposed ruling has been described by US trade groups such as the US National Foreign Trade Council as “gross overreach”.

The draft ruling, first announced in 2021, has already drawn fire from US trades groups and the all-powerful US Treasury which said last year that the proposal would “create a concerning imbalance in the benefits provided under the Australia tax treaty.”

The stakes rose considerably last year with the election of Donald Trump. On the first day of his presidency, Trump threatened punitive new taxes if countries levied “discriminatory or extraterritorial” taxes against US companies.

“Secretary of the Treasury in consultation with the United States Trade Representative shall investigate whether any foreign countries are not in compliance with any tax treaty with the United States or have any tax rules in place, or are likely to put tax rules in place, that are extraterritorial or disproportionately affect American companies,” the announcement from Trump said.

US tech giants such as X, Apple, Google and Meta this month also urged Trump to take action against Australia over new federal laws and “coercing” them into sacrificing revenue in schemes such as the News Media Bargaining Incentive.

But the ATO has confirmed that it will wait for a High Court appeal that goes before the court this week over the tax treatment of payments made to soft drink maker PepsiCo.

PepsiCo’s sale of its concentrate to Schweppes will inform the ATO’s processes.Credit: AP

The tax office is appealing a decision of the Full Federal Court last year which found that PepsiCo was not liable to pay royalty withholding tax on sales of its soft drink concentrate to Schweppes, which bottles and sells PepsiCo soft drinks in Australia, including Pepsi.

In nutshell, PepsiCo won its appeal last year arguing that it was just selling its sugary concentrate to its local bottler, not any IP rights to its product. Although it related to syrup, not software, the same IP and royalty payment issues are at stake in the ATO’s final legal appeal on the matter.

“The ATO has deferred finalising the software royalty draft ruling pending the outcome of the PepsiCo case,” a spokesman said.

The tax office said the PepsiCo case involves embedded royalties, and the High Court’s findings may provide insights that could influence the final ruling on how royalties apply to software arrangements.

“The ATO is awaiting the High Court’s decision to assess any potential impact on its position before finalising the draft ruling on software taxation.”

The hearing is scheduled to be April 2 – just before Trump is scheduled to unveil sweeping tariff increases across its trading partners. Australia could be targeted if it does not back down on these tax matters and perceived trade barriers.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.