PepsiCo - Federal Court of Australia finds that part of the purchase of concentrate by an Australian bottler from an Australian PepsiCo company was a trademark royalty

A U.S. company (PepsiCo) entered into an “exclusive bottling appointment” (“EBA”) with an independent Australian bottling company (“SAPL”). PepsiCo agreed in the EBA to sell, or cause a related entity to sell, beverage concentrate to SAPL for bottling and sale, and granted SAPL the right to use the Pepsi and Mountain Dew trademarks in this regard. In fact, the concentrate was sold by an Australian company in the PepsiCo group (“PBS”) to SAPL. There was a similar arrangement for the licensed bottling and sale by SAPL of Gatorade pursuant to an EBA with another U.S. company (“SVC”).

The definition in Art. 12(4) of the Australia-U.S. treaty (the “DTA”) of “royalties” referred inter alia to “payments or credits of any kind to the extent to which they are consideration for the use of or the right to use any … trademark.”

Moshinsky J found that Australia was permitted under the DTA to impose withholding tax of 5% on a portion of the purchases paid by SAPL to PBS (essentially determined by him to be 5.88%, based on expert evidence as to licensing “comparables”) on the basis that it constituted consideration for the use, or right to use, the trademarks to which PepsiCo or SVC were beneficially entitled, stating:

[W]hile the payments made by SAPL were, on their face, payments for the purchase of concentrate, this is not determinative of their characterisation for the purposes of Art 12(4) … .

PepsiCo and SVC nominated PBS to be the seller of the concentrate under the EBAs for the relevant years. This constituted a direction to SAPL to pay PBS rather than PepsiCo or SVC … .

PepsiCo and SVC … were entitled to receive the payments under the EBAs and directed SAPL to pay PBS. In these circumstances, PepsiCo and SVC were beneficially entitled to the relevant portions of the payments.

Neal Armstrong. Summary of PepsiCo, Inc v Commissioner of Taxation [2023] FCA 1490 under Treaties – Income Tax Conventions – Art. 12.