ATO beats Pepsi in diverted profits fight

PepsiCo may be liable to pay a hefty tax bill to the ATO after a landmark court finding on its Australian profits diverted offshore.

PepsiCo could be liable to pay a tax bill to the ATO after a court finding against it.

The Australian Taxation Office has celebrated its win over drinks giant PepsiCo in a tax battle over diverted profits, marking a flagstone in the taxman’s battle with multinationals over royalty withholding tax.

The Federal Court ruled in the ATO’s favour on Thursday, withholding reasons pending any disputes over confidentiality, finding PepsiCo was liable for royalty withholding tax and in the alternative diverted profits tax.

A penalty hearing will be decided at a later date.

The case marks the first time the Federal Court has ruled on a diverted profits tax matter, a power handed to the ATO in 2017 as part of its toolkit to force multinational companies to “pay the right amount of tax”.

ATO deputy commissioner Rebecca Saint said the decision against PepsiCo, by Justice Mark Moshinski, confirmed the tax office’s powers to tackle tax avoidance.

“The Pepsi matter is a lead case for our strategy to target arrangements where royalty withholding tax should have been paid,” she said.

“While 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.”

However, the PepsiCo matter may be subject to an appeal and Justice Moshinski has given its local bottler Asahi Beverages time to consider the judgement if the Japanese drinks giant seeks confidentiality orders.

Asahi Beverages is the exclusive bottler of PepsiCo’s drinks in Australia.

PwC Australia acted as legal representatives for PepsiCo, while the ATO used Minter Ellison.

The ATO has mobilised to take on multinationals through its Tax Avoidance Taskforce, with a number of companies now facing its ire “because payments have been mischaracterised, particularly payments for the use of intangible assets, such as trademarks”.

The tax office issued alerts over the mischaracterisation of payments in 2018, laying down the law to companies and warning it was “reviewing international arrangements”.

Ms Saint said the Pepsi matter was a “lead case” for the ATO’s strategy to target arrangements where tax should have been paid.

“While 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,” she said.

The diverted profits tax is aimed at ensuring companies do not send profits offshore, subjecting funds to an upfront 40 per cent tax rate.

The ATO said its Tax Avoidance Taskforce has secured more than $27.7bn in additional revenue from multinationals since 2016.

The tax office also noted its efforts had resulted in changes around “the governance and culture around corporate tax”.

PepsiCo has been contacted for comment.