Royalty or not? What New Zealand businesses need to know about the PepsiCo case

By Bart de Gouw, Liam O’Brien and Hamish Butterworth-Snell 
 

In August 2025 the High Court of Australia (HCA) handed down its decision (by a 4-3 majority) siding with the taxpayer in the long running “PepsiCo case” (Commissioner of Taxation v PepsiCo, Inc [2025] HCA 30). This decision has settled a long-standing dispute concerning the application of royalty withholding tax and the Australian diverted profits tax (DPT). The case has attracted significant worldwide attention due to its implications for cross-border arrangements and the treatment of intellectual property in commercial contracts.

Implications for New Zealand businesses

This case is relevant to New Zealand groups with Australian subsidiaries (or broader business relationships with third parties in Australia), and these groups should take note of the HCA’s judgement. The decision provides a judicial framework for assessing the character of payments. It also highlights the importance of determining the objective characterisation of the totality of the arrangements between the parties, serving as a warning against adopting a narrow or overly focused view of isolated clauses or promises exchanged between the parties.

Given the way that the case was resolved in the two judgements, and the significantly different positions that were taken on the objective characterisation of the arrangements, it is not clear to what extent this case will ultimately be taken to have generated significant principles of wider application to royalty issues or is confirmed to its specific and “unique” facts.

It is anticipated that the Australian Taxation Office (ATO) will respond to the PepsiCo decision as it has done previously via a decision impact statement.

The technology industry in New Zealand has been particularly interested in the outcome of this case given the ATO position in the draft Taxation Ruling TR 2024/D1 (TR 2024/D1) regarding when royalty withholding tax will apply in arrangements involving an Australian software reseller/distributor. Following the PepsiCo decision, the ATO stated that it is “currently considering this decision including any broader impact it may have on the reasoning set out” in the draft software ruling. There is no confirmed timeline for the finalisation of the draft ruling.

In addition, this case and the ATO ruling are likely to be of relevance as Inland Revenue continues to work on updating its interpretation guidance regarding the income tax treatment (under New Zealand domestic law) of payments made from New Zealand to non-resident suppliers of computer software (PUB00266 in the Public Guidance work programme 2025-26 August 2025). Although Inland Revenue has not made any public statements, we understand from informal discussions that they do not hold the same view as that published by the ATO in TR 2024/D1.

The case

A background of case, the tax issues and the earlier court decisions can be found in our July 2024 Tax Alert article.

2025 HCA decision

On 13 August 2025, the HCA found (with a 4-3 majority finding) in favour of the taxpayer that no royalty withholding tax )(RWHT) nor DPT applied. The HCA decided on two broad issues (collectively “the grounds”)- two grounds related to the RWHT issue and the third ground related to the DPT issue:

• Ground 1: Did payments made by SAPL to PepsiCo Beverage Singapore Pty Ltd (PBS) under agreements to bottle and sell PepsiCo branded drinks include an amount paid “as consideration for” the use of intellectual property, as defined as a “royalty” in section 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?
• Ground 2: If the answer to Ground 1 is “yes”, was the royalty component of the payments income “derived” by and “paid to” PepsiCo under section 128B(2B) of the ITAA 1936, such that withholding tax was payable under section 128B(5A) of the ITAA 1936?
• Ground 3: In the event that PepsiCo was not liable to withholding tax, was it instead liable to DPT under Part IVA of the ITAA 1936?
  

The findings of the majority (Gordon, Edelman, Steward, and Gleeson JJ) and minority (Gageler CJ, Jagot, and Beech-Jones JJ) is summarised below, however for a full analysis of the majority’s finding and as well as insights from Deloitte Australia, please refer to this Deloitte Australia tax@hand article.

Final thoughts

The HCA’s decision in PepsiCo provides valuable insights into the treatment of payments under cross-border arrangements in an Australia-New Zealand context. For New Zealand businesses, especially those operating in the technology industry, this is a timely opportunity to revisit existing arrangements with Australian subsidiaries to assess whether any modifications are required to those arrangements. If you have any questions about how this decision may affect your arrangements or broader tax positions, please contact your usual Deloitte advisor.