The Australian Taxation Office (ATO) has emerged victorious in a legal battle against PepsiCo over royalty taxes. 

Justice Mark Moshinsky has ruled in favour of the ATO, rejecting Pepsi's challenge against assessments claiming millions in royalty withholding tax and diverted profits tax.

The court case centred on exclusive bottling agreements, beverage concentrate and branding rights with Asahi Beverages (formerly Schweppes Australia) during the 2018 and 2019 financial years.

One related to soft drinks like Pepsi and Mountain Dew and another concerning non-carbonated drinks like Gatorade. Concentrate Manufacturing, a Singapore-based entity under Pepsi, supplied concentrate to PepsiCo Beverage Singapore, an Australian-registered company within the Pepsi group. 

Schweppes Australia, designated as the seller under the bottling agreements, made payments totaling approximately $240 million to PepsiCo Beverage Singapore during the specified financial years.

Justice Moshinsky determined that payments made by Schweppes Australia were royalties subject to a 5 per cent tax. 

While the full judgement remains confidential, it is evident that the ATO sought to reclaim undisclosed tax amounts and potential penalties. 

Justice Moshinsky stated that if royalty tax hadn't applied, the court would have ruled that Pepsi obtained a tax benefit through the deals to reduce foreign tax.

ATO Deputy Commissioner Rebecca Saint says the decision confirms the effectiveness of diverted profits tax as a tool against multinational tax avoidance. 

The ATO's Tax Avoidance Taskforce, targeting instances where royalty withholding tax has been mischaracterised, views the Pepsi case as pivotal in sending a strong signal to businesses with similar arrangements. 

The decision, subject to possible appeal, aligns with the ATO's ongoing efforts to combat tax avoidance, resulting in over $27.7 billion in additional tax revenue from multinational enterprises since 2016.

In a related development, The Coca-Cola Company is currently challenging more than $170 million in taxes imposed by the ATO for alleged offshore profit diversion via favourable deals with its local affiliate. 

The ATO assessed The Coca-Cola Company's diverted profits tax at $173.8 million for the combined 2018 and 2019 years, with legal proceedings underway in the Federal Court of Australia.