International Tax Developments & the High Court’s PepsiCo Decision

Your technical update on cross-border tax compliance in Australia

The High Court of Australia has recently delivered its decision in the PepsiCo case, a landmark ruling that has significant implications for the treatment of cross-border royalties and withholding tax obligations. Combined with a wave of international tax reforms, this decision will shape how multinational groups manage their Australian tax positions in 2025 and beyond.

At Boa & Co. Chartered Accountants, we provide technical guidance to help multinationals manage compliance and mitigate risks. Below, we outline the key developments CFOs, tax managers, and in-house counsel should be aware of.

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The PepsiCo Case – High Court Decision

• The dispute centred on whether certain payments made under licensing and distribution arrangements were subject to royalty withholding tax in Australia.
  
• The High Court confirmed the ATO’s position that such payments could be characterised as royalties, attracting withholding tax.
  
• This decision underscores the need to examine:
  
  • Legal form vs. substance of cross-border arrangements
    
  • The role of intellectual property rights and brand usage in distribution agreements
    
  • Transfer pricing alignment with arm’s length principles
    
• Practical impact: Multinationals with global IP structures or brand licensing models must urgently review cross-border agreements to avoid unexpected withholding tax exposures.
  

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Key International Tax Developments

1. Changes to the Short Form Local File (2025 onwards)

• The ATO has redesigned the short form local file to enhance data collection and risk profiling.
  
• Multinationals will need to provide greater granularity of related party transactions, requiring earlier preparation and coordination across global finance teams.
  

2. Australia’s New Public Country-by-Country (CbC) Reporting Regime

• Public CbC reporting legislation will require large multinationals to disclose jurisdictional revenue, profits, employees, and tax paid.
  
• Unlike OECD private CbC reports, these disclosures will be publicly available, creating reputational, investor, and regulatory risks.
  
• CFOs should anticipate enhanced scrutiny from media, investors, and NGOs.
  

3. Pillar Two – Global & Domestic Minimum Tax

• Australia is implementing the OECD’s 15% global minimum tax, with both Income Inclusion Rules (IIR) and Domestic Minimum Tax (DMT).
  
• Tax teams should:
  
  • Assess scope and applicability
    
  • Model top-up tax exposures
    
  • Align global systems to meet complex compliance reporting
    
• Practical concern: Ensuring data readiness across multiple jurisdictions.
  

4. Hybrid Mismatch Arrangements – Updated Guidance

• The ATO has reinforced its focus on eliminating tax mismatches caused by hybrid entities, instruments, or payments.
  
• Particular risk areas include intragroup financing, structured arrangements, and cross-border deductions.
  
• CFOs should expect increased ATO audit activity in this space.
  

5. New Thin Capitalisation Rules & Transfer Pricing Interactions

• From 1 July 2023, thin cap rules shifted to earnings-based tests:
  
  • Fixed Ratio Test (30% of tax EBITDA)
    
  • Group Ratio Test (based on consolidated accounts)
    
  • Third Party Debt Test (limited to genuine external borrowings)
    
• The rules overlap with transfer pricing, requiring multinationals to maintain robust economic justifications for funding structures.
  
• The ATO has signalled this as a compliance priority area.
  

6. Withholding Tax & Cross-Border Software Payments

• The characterisation of payments for software, digital platforms, and cloud services remains a live issue.
  
• Depending on the nature of rights granted, payments may be characterised as:
  
  • Royalties (subject to withholding tax)
    
  • Business profits (potentially not taxable without a PE)
    
• Multinationals should revisit contracts to confirm appropriate withholding obligations.
  

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The Bottom Line

The combination of the PepsiCo decision and sweeping international reforms makes 2025 a pivotal year for multinational groups in Australia. The ATO has made clear that cross-border payments, financing structures, and public disclosures will be under close scrutiny.

At Boa & Co. Chartered Accountants, we assist clients with:

• Reviewing cross-border agreements for withholding tax risks
  
• Preparing transfer pricing and local file documentation
  
• Assessing Pillar Two readiness and modelling
  
• Advising on thin capitalisation and hybrid mismatch rules
  
• Representing clients in ATO engagement and dispute resolution
  

📩 For technical guidance tailored to your business, contact Boa & Co. Chartered Accountants at [email protected] or 1300 952 286.
Visit us at www.boanco.com.au.