PepsiCo is facing off against the Australian Tax Office (ATO) today over distribution arrangements and diverted profits tax in a two-prong case.
At the heart of the case is whether an arrangement with Schweppes Australia for an exclusive bottling agreement included royalties subject to Australian tax.
The case began in the 2018-19 financial year when the tax office assessed PepsiCo and Stokley Van-Camp as non-residents liable for royalty withholding tax.
Schweppes Australia entered into three different exclusive bottling agreements with PepsiCo and Stokley-Van Camp Inc. for Pepsi, Mountain Dew and Gatorade.
Under the deal, Schweppes Australia had the "right to use trademarks and other intellectual property… to manufacture, bottle, package, sell and distribute finished PepsiCo Group branded beverages", ATO submissions to the High Court said.
Schweppes Australia began paying an Australian member of the Pepsi group, PepsiCo Beverage Singapore, for the concentrate to make the drinks.
The ATO told the High Court that 99.95% of that money was passed on to a Singaporean company in the PepsiCo group.
"No separate amounts were paid by [Schweppes Australia] to [PepsiCo/Stokley-Van Camp] even though those entities granted [Schweppes Australia] the right to use their valuable intellectual property," the ATO told the High Court in its submissions.
PepsiCo says the ATO has misconstrued the situation of payments between Schweppes Australia and PepsiCo Beverages Singapore.
Its submissions to the High Court say the tax office is seeking to apply the law meant for overseas companies to "payments made by one Australian company to another for the purchase of goods".
The second part of the case is the diverted profits tax.
This was introduced in 2017, and the tax office argues that the exclusive bottling agreements formed a scheme that helped Pepsi get a tax benefit.
Pepsi Co and Stokely-Van Camp will tell the High Court that diverted profits arguments don’t apply.
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