The High Court of Australia’s decision in the PepsiCo case marks a turning point in how cross-border arrangements are characterised and taxed, especially when it comes to royalty withholding tax. At the same time, multinational groups are facing sweeping changes in international tax compliance, from new reporting regimes to updated thin capitalization rules.
For multinational enterprise (MNE) groups operating in or through Australia, the stakes have never been higher. With expanded reporting obligations commencing from 2025, tax leaders need to act now.
Key Takeaways from the PepsiCo Case & Recent Developments
1. Royalty Withholding Tax – Lessons from PepsiCo
- The High Court found that payments made under licensing and distribution arrangements could be characterised as royalties, attracting Australian withholding tax obligations.
- The case highlights the need to review distribution agreements, IP licensing, and brand use arrangements.
- Tax leaders should ensure consistency between contractual form, economic substance, and transfer pricing positions.
2. Short Form Local File – Expanded ATO Reporting
- From 2025, the short form local file will require more granular disclosures.
- This expands ATO visibility over related-party transactions and intra-group arrangements.
- Early preparation and coordination with overseas counterparts will be essential.
3. Public Country-by-Country (CbC) Reporting
- Australia’s new public CbC regime requires large MNEs to disclose data on profits, tax, and employees by jurisdiction.
- Unlike private CbC filings, this information will be publicly available — introducing reputation and investor-relations risks.
4. Pillar Two – Global and Domestic Minimum Tax
- Australia has adopted the OECD’s 15% global minimum tax framework.
- Groups will need to model potential top-up taxes, review entity-level ETRs, and prepare for additional compliance filings.
5. Hybrid Mismatch Arrangements
- The ATO has released new guidance reinforcing its position against double deductions and non-inclusion mismatches.
- Structures involving intercompany financing and hybrid instruments are likely to face scrutiny.
6. Thin Capitalisation & Transfer Pricing Alignment
- New rules replace the historic asset-based test with earnings-based ratios (EBITDA).
- Interaction with transfer pricing rules means businesses must carefully align interest deductibility with arm’s-length outcomes.
7. Cross-Border Payments for Software & Digital Services
- The ATO continues to focus on how payments for software, cloud, and digital services are characterised.
- Depending on classification, these may attract withholding tax as royalties.
- Contractual reviews are critical to reduce compliance risk.
Why This Matters to Your Business
The combination of the PepsiCo ruling and upcoming international tax reforms will significantly reshape compliance for global groups. Navigating these changes is not just about staying compliant — it’s about managing tax risk, reputation, and investor expectations.
At Boa & Co. Chartered Accountants, we are already helping clients:
- Review cross-border licensing and distribution arrangements in light of PepsiCo
- Prepare for public CbC reporting and Pillar Two modelling
- Align financing structures with thin capitalisation and hybrid mismatch rules
- Assess withholding tax obligations on software and digital payments
Act Now — Get Ahead of International Tax Reform
With multiple reforms taking effect from 2025 and the High Court’s PepsiCo ruling setting new precedents, now is the time to act. The ATO expects MNEs to demonstrate strong governance and proactive compliance.
📩 Contact Boa & Co. today to discuss how we can strengthen your international tax strategy:
1300 952 286
[email protected]
www.boanco.com.au
Stay ahead of change — with confidence.