Why Royalty Disputes Are Rising in Global Taxation: PepsiCo Case

International taxation is undergoing a profound transformation, marked by unprecedented intensification of administrative scrutiny and court activity. Recent case law hasn’t only clarified interpretative standards and consolidated doctrinal criteria, but has also foreshadowed the issues most likely to dominate future controversy. Understanding this evolving landscape is essential to assess the scope of multinational enterprises’ tax obligations and the increasingly strategic role taxation plays in shaping their business models.

Several indicators reflect the current attitude of tax administrations. This data shows an unequivocal pattern: Tax authorities are expanding and refining their traditional monitoring functions through the use of technological tools, enhanced international cooperation, and regulatory frameworks such as the BEPS Plan.

On the preventive side, early dispute resolution mechanisms have grown steadily. In 2024, the US executed 142 advance pricing agreements and handled 329 mutual agreement procedures, closing 290 cases, including 167 transfer pricing cases. Announcement 2025-13: U.S. APMA program, APA statistics for 2024, Tax News Flash (Mar. 18, 2025); Baker McKenzie, 2024 MAP and APA Statistics, InsightPlus (Feb. 2026). This isn’t isolated and reflects the search for certainty in an environment where regulatory complexity and the risk of double taxation have intensified. At the same time, in Latin America, Mexico increased the revenue derived from transfer pricing audits by 367% between 2019 and 2024, reaching 106.1 billion Mexican pesos ($6.1 billion), which is evidence of a more aggressive and results-oriented tax policy. Servicio de Administración Tributaria (SAT), Crece 367% recaudación de grandes contribuyentes por precios de transferencia, Press Release No. 026/2025 (Mar. 18, 2025).

Europe is consolidating its position as the most active region in international dispute management. Germany leads in the volume of mutual agreement procedures, with 674 cases initiated in 2024, of which 346 were transfer pricing cases, followed by jurisdictions such as Spain, France and Belgium. This dynamism isn’t limited to administrative proceedings; litigation in national courts and arbitration bodies confirms that international taxation has become an area of increasing legal conflict.

Intragroup transactions and intangible assets now account for a substantial part of the value generated by multinational enterprises, making them priority risk areas for tax authorities. In 2024, 44% of total US trade in goods was between related parties, with 49.5% of imports and 35.3% of exports within the same multinational enterprise. Although there are no harmonized global statistics, this is a reliable thermometer of the magnitude of the phenomenon and its structural relevance in the global economy. US Census Bureau, U.S. Goods Trade: Imports & Exports by Related Parties, 2024 (July 3, 2025).

Added to this is the growing significance of intangibles. Cross-border payments for the use of intellectual property, or IP, exceeded $1 trillion, equivalent to 7.5% of global trade in commercial services, with the US, Germany, Japan, and China leading the way. World Intellectual Property Organization (WIPO), “Cross-border Payments for the Use of Intellectual Property (IP) surpass 1 trillion US Dollars in 2022, a record high”, Global Innovation Index Blog (June 28, 2024); World Bank, Charges for the use of intellectual property, receipts (BoP, current US$), World Development Indicators. This figure illustrates the centrality of intangibles in value creation, but also explains why tax administrations have intensified their scrutiny of these traditionally more opaque and difficult-to-value transactions.

Increased scrutiny isn’t an isolated phenomenon, but a response to an environment where business globalization, digitalization, and the mobility of intangibles have extended the complexity of tax planning opportunities. This audit activity isn’t limited to questioning routine adjustments, but goes to the core of business models—challenging structures, contractual arrangements, and risk allocation policies that, until recently, remained under the radar. International taxation is thus no longer perceived as a mere compliance exercise, but a strategic factor, subject to increasing technicality and constant regulatory evolution.

PepsiCo v. ATO Case

As discussed above, the transnational tax structuring of intangibles is one of the main sources of controversy in international taxation. The recent judgment in the High Court of Australia in Commissioner of Taxation v. PepsiCo, Inc.; Stokely-Van Camp, Inc., [2025] HCA 30 ended years of litigation between PepsiCo and the Australian Taxation Office, or ATO, and sets out criteria for the design and remuneration of international IP assignment structures. The decision, adopted by a majority of 4:3, was in favor of PepsiCo, and provides practical lessons for multinationals that combine sales of goods with licensing of intangibles.

Given the complexity of the scheme, it’s essential to define three key aspects:

• Entities involved (Commissioner of Taxation v. PepsiCo, ¶¶6-12):
  
  • PepsiCo, Inc (“PepsiCo”) and Stokely-Van Camp, Inc., or SVC, are the entities holding global portfolios of brands and additional IP; Pepsi, Mountain Dew, Gatorade, etc.
  • Schweppes Australia Pty Ltd., or SAPL, is an independent bottling entity in Australia.
  • PepsiCo Beverage Singapore Pty Ltd., or PBS is a subsidiary of the group incorporated in Australia, designated as a concentrate seller to SAPL.
  • Concentrate Manufacturing (Singapore) Pte Ltd., or CMSPL, is a concentrate manufacturing subsidiary and a supplier to PBS.
• Contractual arrangements involved (Commissioner of Taxation v. PepsiCo, ¶¶13-22):
  
  • Exclusive bottling agreements, or EBAs between PepsiCo/SVC and SAPL, whereby PepsiCo and SVC appointed SAPL as an exclusive bottler and distributor in Australia, granting it a license, express in the case of SVC and implied in the case of PepsiCo, to use the trademarks and other intangible assets necessary to manufacture and market the beverages. These licenses were conditional on strict quality, presentation and marketing obligations, as well as the exclusive purchase of the concentrate from PepsiCo’s designated seller. Although the agreements established reference prices for the concentrate, they didn’t produce immediate sales, but provided for future contracts that, in practice, were implemented through purchase orders and invoices between SAPL and PBS, the group’s Australian subsidiary.
  • The performance agreement between SAPL and another group entity reinforced this structure by imposing sales targets, distribution standards, and marketing investment commitments.
  • Cooperative advertising and marketing agreements regulated the financing and execution of advertising campaigns, establishing financial contributions and control mechanisms over the use of the brand image.
• PepsiCo group’s business scheme in Australia, which was based on an exclusive bottling system:
  
  • Through the exclusive bottling agreements, SAPL obtained the right to manufacture, bottle, and distribute beverages under PepsiCo group brands in Australia. To do so, it had to purchase the necessary concentrate from a seller appointed by PepsiCo, which turned out to be PBS. The group entity in Australia, in turn, purchased the concentrate from CMSPL, retaining a minimal margin.
  • Although the exclusive bottling agreements didn’t provide for royalty payments, it was common ground that SAPL received a license, express or implied, to use the group’s IP, which was essential to market the products. In practice, SAPL placed orders with PBS and paid for the concentrate on the basis of invoices issued by PBS. Commissioner of Taxation v. PepsiCo, ¶¶23-27.

This operation can be summarized graphically as follows:

Simplified Scheme of the Flow of Assets and Consideration of the Operation

The ATO determined that Australian tax regulations were being breached by the scheme, and essentially proposed two alternative theories into which it could fit, both involving penalties and tax adjustments against the US beverage group (Commissioner of Taxation v. PepsiCo, ¶28-34):

• Disguised remuneration of IP through concentrate price. The ATO argued that royalty withholding tax, or WHT, was being avoided on the basis that payments for the use of IP weren’t separately identified or taxed as such, but were instead embedded in the payments SAPL made to PBS for the concentrate. On the ATO’s view:
  
  • Payments that SAPL made to PBS were ultimately intended to remunerate PepsiCo.
  • If no disguised royalty payments were found, the ATO argued that PepsiCo’s structure was a scheme expressly designed to obtain and exploit tax benefits, which in Australia falls within the application of the diverted profits tax—in which case PepsiCo should still be required to pay this adjustment. (ITAA 1936 (Cth), §177J, §177CB(3), §177P: The Australian diverted profits tax imposes a 40% tax on profits made by schemes that artificially reduce the tax base in Australia. Its application requires demonstration of a “reasonable alternative postulate” evidencing the tax benefit.)

While the 4:3 majority decision was narrowly split, it’s worth examining the reasoning of the two groups in the court, as their views diverge significantly and both may prove influential in future disputes.

First, the court considered whether the arrangement involved royalty compensation for the assignment of IP that hadn’t been subject to WHT. Both groups started from the same premise that the concept of “consideration for” in the statutory definition of royalty is not limited to the classical notion of contractual quid pro quo, but may encompass the basis, purpose, or condition upon which the use of the IP is conferred. (ITAA 1936 (Cth), §6(1): Royalty is defined as “any amount paid or credited, however described or calculated, in so far as it is paid or credited as consideration for the use of, or the right to use”, inter alia, IP rights.) (Commissioner of Taxation v. PepsiCo, ¶¶45-48: The court interprets “consideration for” broadly, as a cause for the grant of the right, not limited to the contractual quid pro quo.) The majority expressly adopted this broader understanding of “moving” or “material cause,” while the minority accepted that a royalty may be identifiable even if not expressly labeled or quantified ex ante. Commissioner of Taxation v. PepsiCo, ¶¶46-47 (the court understands the “moving cause” or “material cause” of the payment as the cause motivating it, its basis or condition).

From that point on, the divergence between the two groups was methodological and factual. The majority adopted an objective reading of the contractual framework and distinguished between the following two levels:

• Composite agreement, described as the SAPL “Bottler, Seller and Distributor Agreement”, that governed SAPL’s status as bottler and the obligations relating to quality, distribution, and promotion. (The composite agreement comprises the EBAs, the performance agreement and the co-operative advertising and marketing agreements.)
• Stand-alone sales contracts between SAPL and PBS, concluded ex post by means of orders and invoices, at arm’s length prices and not disproportionate.

Under this framework, the contractual price paid to PBS for the concentrate was treated as consideration for goods sold and delivered.

The majority held that allocating part of that price to a royalty “would imply attributing to a separate commercial arrangement a portion of a fair price for goods.” Commissioner of Taxation v. PepsiCo, ¶¶72-74.The contractual price was decisive because the ATO didn’t allege that the concentrate was overpriced or that the invoiced amount contained a “hidden royalty,” and the majority concluded that the price of the goods sold couldn’t be disaggregated in order to impute an IP component.

The minority rejected any fragmentation of the arrangement, classifying the set of agreements involved as a single, integrated, and indivisible transaction, in which the promises form a whole that can’t be split up. Under that framework, SAPL’s promise to pay for the concentrate also “moves” the granting of the license because part of the price of the concentrate is consideration for the IP, even if it isn’t denominated or separated in accounting terms. On that reasoning, if it’s accepted that the payment for concentrate, within the scheme, partly displaces the license, the conclusion that it includes royalty becomes inevitable. Commissioner of Taxation v. PepsiCo, ¶¶90-93.

Second, the court considered whether the alleged royalty income could be treated as having been derived by PepsiCo or SVC. On this point, there was convergence between the two sides as, even hypothesizing the existence of a royalty component, the regulatory requirements weren’t met. SAPL paid PBS, the actual seller of the concentrate, and held the title and risk until delivery/payment. In this sense, there was no pre-existing monetary obligation on SAPL to PepsiCo/SVC capable of being satisfied by “payment by direction.”

In other words, in the terms, substance and effect of the exclusive bottling agreements, “there was no monetary obligation or payment by SAPL to PepsiCo for or in respect of the concentrate.” The conclusion in this case is clear: Without income being derived by, or payment made to nonresident IP holders, the taxable event of the WHT doesn’t arise missing even if, in the minority’s view, there had been a royalty in an economic-functional sense. ITAA 1936 (Cth), §6(1), §128B(2B), §128B(5A); Commissioner of Taxation v. PepsiCo, ¶¶115-118.

Finally, and in the absence of the existence of disguised royalties, the court assessed whether the structure put forward by the PepsiCo group was likely to qualify as a scheme, that is, expressly designed to achieve a tax benefit, and therefore be subject to WHT. At this point, the key is to identify where this tax benefit could occur and what method or approach is valid to confirm that had another structure been put in place, the tax result would have been different.

The court majority concluded that it wasn’t possible to frame the operation within the requirements to apply the diverted profits tax. Two points from the reasoning are worth underlining, as they are likely to carry weight in future disputes of this kind:

• The reasonable postulate of §177CB(3) is not just a procedural formula, it requires that any finding of a tax benefit under the diverted profit tax rest on a “reasonable alternative postulate”, that is, a plausible description of what the taxpayer would have done if the scheme had not been entered into. The provision uses “must”, not “should”. That choice of wording is critical: absent a reasonable alternative postulate, the counterfactual cannot be constructed, and without a counterfactual there is no tax benefit to speak of. The practical consequence is often missed. In unusual cases such as this one, the taxpayer is not required to offer their own counterfactual. It is enough to show that none of those advanced by the tax authority is reasonable. The economic and commercial substance of the transaction sets the boundaries of what is reasonable.
• For the majority group, the substance was that “the price agreed for the concentrate was for the concentrate” and that the grant of the IP wasn’t gratuitous, since the remuneration for the license was in SAPL’s package of obligations, not in the price of goods; furthermore, the transaction was on arm’s length terms and was consistent with the historical franchise-owned bottling operation model of the sector. Commissioner of Taxation v. PepsiCo, ¶¶150-153. Franchise-owned bottling operation, also referred to as FOBO, is the historical model used by PepsiCo and other beverage manufacturers since the early 20th century. Under this scheme, the brand owner (franchisor) retains ownership of the intangibles and supplies the concentrate, while the independent bottler assumes the investment in plant, equipment and distribution, as well as marketing and sales obligations.

The minority group, on the other hand, extended its thesis of contractual indivisibility to the diverted profits tax, reasoning that if the arrangement must be viewed as an indivisible “whole” then part of the price necessarily includes royalties. And, therefore, in the reasonable alternative scenario, PepsiCo and SVC would have been subject to WHT and, hence, the tax benefit would emerge.

Beyond the express wording of the ruling, it should be noted that the arm’s length nature of the transaction between SAPL and PBS was a decisive factor for the majority to conclude that the payments corresponded exclusively to the concentrate. (It is considered arm’s length both because they were considered independent entities and because the price paid for the concentrate was not disproportionate to comparable transactions similarly carried out by independent third parties.)

However, the independence of the shareholding between SAPL and PBS doesn’t exclude the existence of other forms of economic or functional links. The commercial relationship with the PepsiCo Group, articulated through the exclusive bottling agreements and ancillary agreements generated a significant dependency, since SAPL assumed obligations that conditioned its operations in Australia (marketing, quality standards and distribution) with the objective of preserving and enhancing the brand.

If prices hadn’t been consistent with the arm’s length principle, transfer pricing adjustments—and even the characterization of the relationship as related—might have been considered. This scenario isn’t merely a hypothetical possibility: Australian law recognizes the concept of entities being “sufficiently influenced”, under which a party that exercises substantial influence over the management or business decisions of another entity may be treated as an associate even in the absence of a shareholding link. ITAA 1936 (Cth), §318 (defines “associated entities” and includes the criterion of “sufficiently influenced”, whereby a formal designation is not necessary to assess substantial influence). This criterion, replicated in many jurisdictions and taken up by the Organization for Economic Cooperation and Development in its definition of associated enterprises, reinforces the idea that economic substance can prevail over corporate form in the delimitation of tax risks. OECD, Model Tax Convention on Income and on Capital, art. 9 (Paris, 2026); OECD, Model Tax Convention on Income and on Capital (Condensed Version), art. 9 and Commentary (Paris, 2017).

It’s worth noting that the main lessons of this case aren’t only the interpretation of the royalty concept or the application of the diverted profits tax, but also the confirmation that tax authorities will continue to intensify their scrutiny of cross-border structures involving intangible assets.

Takeaways

From a practical perspective, the ruling highlights three areas for multinational groups:

• The majority decision relied on the existence of well-structured contracts and documentary evidence attesting to the separation between the sale and purchase of concentrate and licensing. This implies that the wording must go beyond standard formulas, with contracts needing to clearly reflect the economic logic of each flow, avoiding ambiguities that allow management to reconstruct the substance of the transaction. In environments where IP is essential for commercial exploitation, a lack of precision may be interpreted as an indication of implicit remuneration.
• A decisive element was proof that the price of the concentrate was at arm’s length and not disproportionate. In scenarios where a margin is difficult to justify, the risk of re-characterization as a royalty increases exponentially. A comparability analysis and contemporaneous documentation to support the allocation of value between tangible and intangible assets is therefore essential.
• Although PepsiCo was successful in defusing the application of the diverted profits tax, the ATO’s argument reveals that this instrument will be consolidated as an alternative route when the characterization of payments is controversial. Companies should anticipate this approach through internal assessments of “reasonable assumptions” and an analysis of economic substance. This requires an integrated view where it won’t be enough to comply with contractual literalism; it will be necessary to demonstrate that form and substance converge in a defensible commercial rationale.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Antonio A. Weffer is a principal in Baker McKenzie’s Tax Practice Group and the head of the firm’s transfer pricing practice in Luxembourg. The author would like to thank Hugo Arribas Saldaña for his contributions.

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