The Diverted Profits Tax (DPT) continues to attract scrutiny in the United Kingdom and Australia. Created to counter structures perceived to shift taxable profits away from where activities occur, DPT — often dubbed the ‘Google Tax’ — arrived in the UK in 2015 and in Australia in 2017, amid concerns that classic transfer pricing and withholding rules struggled with highly mobile intangibles and complex global supply chains.
In the UK, policy signals point to an evolution in form rather than function: HMRC has indicated an intention to bring diverted‑profits charging concepts within the corporation tax framework while preserving the regime’s deterrent effect and enabling treaty access. The goal is closer alignment with transfer pricing principles without blunting enforcement utility — reflecting a broader trend of using DPT levers to influence taxpayer behavior and encourage timely resolution.
Australia’s most prominent test of how DPT interacts with royalty withholding rules has been the PepsiCo litigation, culminating in the High Court’s decision in Commissioner of Taxation v PepsiCo, Inc [2025] HCA 30. The dispute concerned exclusive bottling agreements under which an Australian bottler purchased concentrate from a nominated entity while receiving rights to use trademarks and related IP, with no express royalty specified in the contracts.
Although the Commissioner succeeded at first instance — on the basis that a portion of the concentrate price represented an embedded royalty and that DPT applied in the alternative — the Full Federal Court disagreed, and in August 2025 the High Court, by a 4 – 3 majority, dismissed the Commissioner’s appeals.
On royalty withholding tax, the majority focused on the interpretation of the contracts and the bargain the parties actually struck. On the facts, no royalty was required by the agreements; concentrate pricing was accepted as arm’s length; and the IP permission operated within a single, integrated supply and distribution arrangement rather than as a stand‑alone, separately priced license. The Court rejected the suggestion that IP was provided ‘for nothing’, accepting that value flowed to the licensor through the bottler’s undertakings and performance.
The Court was unanimous on a separate and decisive point: even if one hypothesized a royalty, the amounts in issue were neither ‘paid or credited to’ nor ‘derived by’ PepsiCo or its US affiliate for the purposes of the withholding regime, because the cashflows were to a different entity for concentrate supply.
Turning to DPT, this was the High Court’s first detailed engagement with the provisions. The majority held that no DPT tax benefit arose because the Commissioner’s counterfactuals failed the statute’s ‘reasonable alternative’ requirement — they were not commercially or economically equivalent to what actually occurred. The reasons also indicate that the arrangements were not entered into with a principal purpose of obtaining a DPT advantage.
The practical effect is to raise the bar for embedded‑royalty and DPT theories where arrangements are arm’s length, coherent in commercial terms, and supported by robust documentation. Outcomes, however, remain highly fact‑dependent and may differ in intra‑group contexts or where pricing or substance is less defensible.
Building upon the perspective we shared in an earlier post on the diverted profits tax, multinationals structuring cross‑border IP and distribution models, PepsiCo underscores the importance of clear contract architecture, traceable cashflows, and supportable pricing — especially where brand, software, patent, or data‑driven intangibles are central to the business model.
