PepsiCo has been ordered by the Federal Court to pay royalty withholding tax and, in the alternative, diverted products tax (DPT), which would apply.
The first time it has been considered in court, DPT is a new tool to ensure large global businesses operating in the country are paying the correct amount of tax by the level of their economic activities.
The tool was designed to prevent the diversion of profits offshore through contrived arrangements and imposes a 40 percent tax penalty rate to be paid upfront.
It is a separate tax liability from income tax; therefore, a taxpayer may have an income tax assessment and DPT assessment for the same period.
The Australian Taxation Office (ATO) has been targeting arrangements where royalty withholding tax has not been paid because payments have been mischaracterized, mainly for using intangible assets, such as trademarks.
“The PepsiCo matter is a lead case for our strategy to target arrangements where royalty withholding tax should have been paid,” remarked Deputy Commissioner Rebecca Saint.
“While there may still be more to play out in this matter, it sends strong signals to other businesses with similar arrangements to review and consider their tax outcomes.”
The Tax Avoidance Taskforce (TAT) focuses on multinational tax avoidance and profit shifting. Most large businesses are meeting their tax obligations; however, the ATO said it will continue to use all the tools to challenge those who don’t.
Since 2016, the TAT has secured more than $27.7 billion in additional tax revenue from multinational enterprises and large public and private businesses (up to 31 August this year).