In the complex world of taxation, court judgments often serve as a rulebook. They clarify how legislation should be applied, setting precedents that taxpayers and revenue authorities rely on to support and defend their positions. Recently, two high-profile beverage giants: PepsiCo and Coca-Cola, have tested these boundaries, with quite different results.
PepsiCo – Australian High Court rules on bottling agreements
Background
Two PepsiCo US group entities (“PepsiCo”) entered into a concentrate supply agreement with Schweppes Australia Pty Ltd (“SAPL”), enabling SAPL to manufacture branded drinks. Alongside this, PepsiCo granted SAPL an exclusive licence to use trademarks and other intellectual property (“IP”) rights necessary to manufacture, package, and distribute the drinks in Australia. The contracts clearly stipulated the agreed consideration.
The Australian Tax Commissioner challenged the arrangement, arguing that part of the payments should be recharacterised as royalties and subject to withholding tax (“WHT”). The Federal Court initially agreed, holding that the bottling agreements effectively included royalties (despite no express royalty clause), triggering WHT or diverted profits tax (“DPT”). As expected, PepsiCo was not satisfied with this judgment, hence an appeal was lodged.
Appeal outcome
On appeal, the Full Federal Court overturned this decision. The majority found that, because the agreements did not expressly include royalties, neither WHT nor DPT applied. On 13 August 2025, victory was achieved by PepsiCo in the appeal when the High Court of Australia delivered a split 4-3 ruling upholding this outcome, confirming the payments were solely for concentrate and not IP royalties.
Key takeaway
This case highlights the importance of robust intercompany agreements. By clearly defining the property transferred and the price charged, PepsiCo was able to discharge the burden of proof and ultimately prevail.
Coca-Cola U.S. transfer-pricing appeal escalates
Background
While PepsiCo secured a win, Coca-Cola faces an uphill battle. The US Tax Court previously upheld a $9 billion income reallocation, increasing Coca-Cola’s U.S. taxable income. The court endorsed the Internal Revenue Service’s (“IRS”) Comparable Profits Method (“CPM”), rejecting Coca-Cola’s longstanding “10-50-50” formula, and finding that the US parent was under-remunerated for its valuable IP and marketing activities. The adjustment resulted in a $2.7 billion tax deficiency, including penalties and interest
Recent developments
In March 2025, Coca-Cola filed an appeal with the Eleventh Circuit. It argues the IRS’s abandonment of the long-accepted formula amounts to a “bait-and-switch.” The appeal questions the reliability of CPM and argues that the IRS’s sudden change in approach is unfair and inconsistent. This argument is also supported by three of the Big Four firms.
Implications
The ruling could redefine the IRS’s authority under section 482, either affirming or limiting its discretion to retroactively apply new methods. The outcome may also influence global transfer pricing practices, particularly the valuation of marketing-related intangibles.
Conclusion
The PepsiCo decision narrows the Australian Tax Office’s ability to recharacterise supply payments as royalties, providing clarity for multinationals operating in Australia. By contrast, Coca-Cola’s appeal outcome remains uncertain, but the stakes are high: the case could reshape the IRS’s transfer-pricing powers and ripple across global tax regimes.
We invite you to get in touch to explore how your intercompany arrangements can be structured for maximum clarity and strength.
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