The Australian Taxation Office (ATO) welcomes the decision by the Federal Court in relation to PepsiCo, Inc. v Commissioner of Taxation. The Court delivered an oral judgment yesterday with the full judgment subject to confidentiality orders.
US-based Pepsi challenged an assessment for the 2018 and 2019 financial years by the Commissioner of Taxation that said the Pepsi owed millions in royalty withholding tax and diverted profits tax over its deals with then-named Schweppes Australia. The Schweppes Australia is now named Asahi Beverages.
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.’
‘This outcome was only possible after years of hard work by the talented and dedicated officers in the Tax Avoidance Taskforce,’ Ms Saint said.
The Tax Avoidance Taskforce has a strong focus on multinational tax avoidance and profit shifting. Most large businesses are meeting their tax obligations, however, we will continue to use all the tools at our disposal to challenge those who don’t.
Since 2016, the Tax Avoidance Taskforce have secured more than $27.7 billion in additional tax revenue from multinational enterprises, large public and private businesses (up to 31 August 2023), but perhaps more importantly the governance and culture around corporate tax has changed.
The Diverted Profits Tax (DPT) is designed to ensure the tax paid by significant global entities (SGE) properly reflects the level of their economic activities in Australia. It aims to prevent the diversion of profits offshore through contrived arrangements. It imposes a 40% penalty rate of tax to be paid upfront.
The DPT aims to prevent the diversion of profits offshore through arrangements involving related parties and encourages SGEs to provide sufficient information to the ATO to allow for the timely resolution of tax disputes.
The DPT is a separate tax liability to income tax, therefore a taxpayer may have an income tax assessment and DPT assessment in respect of the same period.
Further information about the DPT can be found on the ATO’s website: Diverted profits tax | Australian Taxation Office (ato.gov.au)
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