Implications for Diverted Profits Tax & RWHT of PepsiCo Tax Case

The recent PepsiCo vs Commissioner of Taxation case is one of the most significant developments in Australian tax law in recent years. It addresses two critical issues, royalty withholding tax (RWHT) and Diverted Profits Tax (DPT), in the context of complex arrangements involving intellectual property (IP) and independent third-party bottling agreements. The High Court’s decision provides valuable guidance for multinational businesses on how payments connected to the use of intangibles should be characterised and taxed in Australia. Background of the PepsiCo Tax Case in Australia The PepsiCo group runs a global beverage business. Several US-resident subsidiaries own key intellectual property (IP) for brands such as Pepsi, Mountain Dew, and Gatorade. In 2009, PepsiCo updated its exclusive bottling agreements (EBAs) with an independent Australian bottler. These allowed the bottler to make, market, and distribute PepsiCo drinks in Australia, while separate agreements covered marketing and advertising. The bottler was not part of the PepsiCo group. Under the EBAs: PepsiCo, or a related entity, supplied concentrate to the bottler, who mixed it with other ingredients to produce finished beverages for sale in Australia. PepsiCo granted the bottler rights to use its IP and packaging, with strict controls on how the IP could be used. The bottler bought concentrate from PepsiCo Beverage Singapore (PBS). For the 2018 and 2019 years: PBS acquired concentrate from another PepsiCo entity, processed orders from the bottler, issued invoices, and shipped the concentrate for local production. Two sets of proceedings followed: Under the Judiciary Act 1903 (Cth), PepsiCo sought a declaration that it was not liable for royalty withholding tax (RWHT). Under the Taxation Administration Act 1953 (Cth), it challenged Diverted Profits Tax (DPT) assessments. On 30 November 2023, Justice Moshinsky found for the Commissioner on both issues. The Full Federal Court later ruled for the taxpayers, but the Commissioner appealed. The PepsiCo vs Commissioner of Taxation matter was heard in the High Court on 2–3 April 2025, raising important questions on use of intangibles and Australia’s DPT rules. Key Issues Before the High Court The PepsiCo vs Commissioner of Taxation appeal raised two main questions: Royalty Withholding Tax (RWHT): Whether the payments made by the Australian bottler under the EBAs were “royalties” under section 128B of the Income Tax Assessment Act 1936 (ITAA 1936). If so, whether those royalties were “derived” by PepsiCo, a non-resident, and therefore subject to RWHT. Diverted Profits Tax (DPT): Whether PepsiCo was liable for DPT under section 177P of the ITAA 1936, on the basis that the EBAs were primarily designed to avoid RWHT and reduce PepsiCo’s US tax obligations. The case was heard by a full seven-judge panel of the High Court of Australia. The High Court unanimously ruled in PepsiCo’s favour on the RWHT issue. While three justices found that the payments were royalties, all seven agreed that PepsiCo had not “derived” the income. The DPT question was resolved by a narrow 4–3 majority, again in PepsiCo’s favour, concluding that the principal purpose of entering into the EBAs was not tax avoidance. Royalty Withholding Tax (RWHT) Issue Under Australia’s tax law, royalties paid to a US-resident are generally subject to a 5% withholding tax. In this case, the High Court focused on whether the payments made by the Australian bottler were “royalties” under section 6(1) of the ITAA 1936. Were the bottler’s payments for IP use? The Commissioner argued that part of the bottler’s payments to PepsiCo Beverage Singapore (PBS) were effectively for the right to use PepsiCo’s IP, since valuable IP could not have been licensed “for nothing.” The High Court disagreed. It treated the exclusive bottling agreement (EBA) as an umbrella contract governing future dealings, where PepsiCo’s consideration for licensing IP included the bottler’s promise to build the PepsiCo brand in Australia, not monetary payments. Each invoice for concentrate was treated as a separate arm’s length sale between PBS and the bottler, with no royalty component. Key takeaway: When agreements involve both tangible goods and intangible rights, it is crucial to identify precisely what each payment is for. Where IP rights and other property can be separated payments for goods may not be treated as royalties. Did PepsiCo “derive” the income? The Commissioner also argued that, even if PBS received the payments, they should be treated as income “derived” by PepsiCo. The High Court rejected this. The bottler owed payment only to PBS, not PepsiCo. PepsiCo held no legal title to the concentrate, and no antecedent obligation existed between the bottler and PepsiCo. The payments simply discharged the bottler’s debt to PBS, an Australian tax-resident entity. Key takeaway: The Court confirmed that PepsiCo did not derive the amounts paid to PBS, further supporting that RWHT did not apply. This finding is closely tied to PepsiCo’s unique facts, particularly the presence of an unrelated, arm’s length bottler and a separate Australian-resident seller. Diverted Profits Tax (DPT) Issue Australia’s Diverted Profits Tax (DPT), introduced in 2017, sits within the country’s General Anti-Avoidance Rules (Part IVA) and operates outside tax treaties. It was designed to: Ensure tax paid by significant global entities (SGEs) reflects their real economic activities in Australia. Prevent profits being shifted offshore through artificial arrangements. Encourage SGEs to provide sufficient information to the ATO to resolve disputes efficiently. If the rules apply, tax is imposed at 40% on the diverted profit. The PepsiCo tax case was the first judicial test of the DPT. For PepsiCo to be liable, two conditions needed to be met: Entry into the EBAs had to produce a DPT tax benefit: namely avoiding RWHT and reducing US tax liabilities. It had to be concluded, after considering statutory factors, that the EBAs were entered into for a principal purpose of gaining that benefit. Competing views on “reasonable alternatives” The Commissioner argued that a reasonable alternative arrangement could have been made, with minor wording changes to the EBAs, that would have treated bottler payments as including a royalty, resulting in more tax. PepsiCo argued that no reasonable alternative existed. The EBAs reflected genuine commercial arrangements necessary to

Expat Income Tax in France: Determining Tax Residency & Tax Rate

Moving to France for work can be an exciting opportunity, but it also brings new responsibilities, especially when it comes to taxes. This guide explains the basics of tax residency, household taxation, progressive tax brackets, and the new reforms that may affect expat income tax in France. With clear examples, we’ll break down how much you might pay and what special rules apply if you’re earning a higher income. Who is an expat (expatriate)? An expat (short for expatriate) is someone who lives and works outside their home country, usually for work, study, or personal reasons. They are not necessarily citizens of the country they are living in. How France Determines Tax Residency Understanding whether you’re considered a tax resident in France is crucial, as it dictates your tax obligations. French tax residency isn’t solely based on the number of days spent in the country; several factors are considered: 183-Day Rule: Spending more than 183 days in France during a calendar year typically classifies you as a tax resident. Sometimes even if your stay is less than 183 days, the French tax authorities may still consider you a tax resident if your time in France exceeds your time spent abroad. Home in France: Owning or renting a home in France indicates tax residency. If you do not have a home, your main place of stay is used, and staying over 183 days generally qualifies. Professional activity in France: Performing work or running a business in France (full-time or primary activity) establishes residency, even if employment is part-time or incidental. Center of economic interests: This includes your primary investments, business headquarters, main professional activities, or the location from which most of your income originates. Meeting just one of these criteria is enough for the French tax authorities to classify you as a tax resident. Income Tax Rates in France The tax system is progressive, meaning the rate increases as your income rises. For the 2025 tax year, the income tax brackets are as follows: Income (€) Tax Rate Up to 11,497 0% 11,498 – 29,315 11% 29,316 – 83,823 30% 83,824 – 180,294 41% Over 180,2934 45% How Income Tax Is Calculated in France In France, income tax is determined based on the combined income of the household, rather than on an individual basis. This includes income from multiple sources such as wages, salaries, allowances, pensions, and property income. To account for household size, France uses a “family quotient” system: Each adult counts as one unit. Each of the first two children counts as half a unit. Each additional child counts as one full unit. The total household income is divided by the number of units, and the tax rate is then calculated according to this adjusted amount. This system ensures that larger households benefit from a lower effective tax rate relative to their combined income. Example for single person households For a single individual earning €30,000 per year, the income tax would be calculated using France’s progressive tax rates as follows: First €11,497 → taxed at 0% → €0 For income from €11,498 to €28,315 taxed at 11% → (28,315 – 11,497) * 0.11 = €1,849.98 For income from €28,316 to €30,000 taxed at 30% → (30,000 – 28,316)*0.3 = €505.2 Total income tax: €2,355.18 which represents approximately 7.85% of total income. Example for a family of three If a family has two adults and one child, the family quotient is 2.5, 1 for each adult and 0.5 for the child. Assume the household earns €60,000 per year the income on which tax is payable is €24,000 (60,000/2.5). Now the tax will be calculated as follows: First €11,497 → taxed at 0% → €0 For income from €11,498 to €28,315 taxed at 11% → (24,000 – 11,498) * 0.11 = €1,375.22 Multiply by the number of units 1,375.22 × 2.5 = €3,438.05 total tax Effective tax rate for the household: €3,493.88 ÷ €60,000 ≈ 5.73% Additional Tax for high income earners In response to growing concerns over income inequality, the French government proposed the Contribution Différentielle sur les Hauts Revenus (CDHR) in the 2025 Finance Bill. This measure ensures that high-income households contribute a minimum effective tax rate of 20% on their reference tax income. The CDHR applies to tax residents of France whose adjusted reference tax income exceeds €250,000 for single taxpayers and €500,000 for couples filing jointly. These thresholds pertain to the household’s total income, including wages, investment returns, and other taxable earnings. Calculation of Tax for High Earning Individuals CDHR = (20% of adjusted reference tax income(RFR)) – (total income tax + exceptional contributions (CEHR) + withholding taxes) French Expat Incentives: Impatriate Regime France offers an Impatriate Regime to attract skilled foreign workers. If you qualify, this regime provides: Partial Exemption: A portion of your foreign-source income may be exempt from French taxation for up to 8 years. Eligibility: To benefit, you must have been a tax resident outside France for at least five years before starting your employment in France. Your employment must be with a French company that recruits you from abroad. However, it’s important to note that social security contributions still apply under this regime, and the exemptions pertain only to income tax, not to all forms of taxation. Double Taxation Agreements (DTAs) France has signed Double Taxation Agreements (DTAs) with Singapore, Australia, and New Zealand to prevent individuals from being taxed twice on the same income. These agreements typically allocate taxing rights between the countries and provide mechanisms for relief from double taxation, such as: Tax Credits: Allowing you to offset taxes paid in one country against your tax liability in the other. Exemptions: Certain types of income may be exempt from tax in one of the countries. It’s essential to consult the specific DTA between France and your home country to understand the exact provisions. For Singaporean, Australian, and New Zealand citizens working in France, tax residency is the deciding factor in whether you pay taxes locally. Once considered a French

French Transfer Pricing Documentation Requirements

Proper documentation is a cornerstone of compliance with transfer pricing rules in France. For international businesses operating in or through France, understanding the legal obligations around documentation is essential to avoid significant penalties and ensure alignment with global standards. This blog explains what is transfer pricing documentation and the French transfer pricing documentation  requirements. What is transfer pricing documentation? Transfer pricing documentation is a set of records that multinational companies must prepare to justify the prices charged in transactions between related entities. It shows that these prices follow the arm’s length principle and comply with local and international tax rules, such as the OECD Transfer Pricing Guidelines. This documentation typically includes a master file, local file, and sometimes a country-by-country report, depending on the size and structure of the business. French Transfer Pricing Documentation Requirements Who Is Required to Prepare Transfer Pricing Documentation? Under Article L. 13 AA of the French Tax Procedure Code (FTPC), the obligation to maintain formal transfer pricing documentation applies to: French companies (or French permanent establishments of foreign enterprises) that have: Annual turnover (excluding tax) or total gross assets of at least €150 million, or Ownership—direct or indirect—of more than 50% of another company that meets the threshold above, or Are themselves more than 50% owned by a legal entity meeting the above condition, or Are part of a French tax-consolidated group that includes at least one entity satisfying any of the criteria above. These transfer pricing rules in France apply broadly, capturing both French multinationals and foreign businesses with substantial French operations. Lighter Requirements for Smaller Entities Entities that do not meet the thresholds under Article L. 13 AA may still be asked to provide transfer pricing information under Article L. 13 B of the FTPC. In such cases, the French Tax Administration (FTA) may request a simplified version of the documentation, often referred to as a “light” file. Companies typically have 60 to 90 days to respond. What Must Be Included in the Documentation? Companies subject to Article L. 13 AA must prepare and retain transfer pricing documentation that includes: A master file: providing an overview of the global operations of the multinational group. A local file: containing detailed information about the local entity’s intragroup transactions, functional analysis, and comparable. A reconciliation file: linking the applied transfer prices to the French statutory financial statements. The documentation must be available at the start of any tax audit and provided in electronic format. Mandatory Filing: Form 2257-SD French companies with annual turnover or gross assets of €50 million or more, or that own or are owned (directly or indirectly) by another company meeting this threshold, must submit Form 2257-SD. This annual transfer pricing return must be filed electronically within six months after filing the corporate income tax return. Country-by-Country Reporting (CbCR) In line with OECD BEPS Action 13 and EU law, France has implemented Country-by-Country Reporting rules: Applies to multinational groups with consolidated revenues exceeding €750 million. Effective for fiscal years beginning on or after January 1, 2016. Includes Public CbCR for certain businesses, increasing transparency and global comparability. Exemptions Exemptions from transfer pricing documentation and declaration requirements apply when cross-border intra-group transactions of a specific type do not exceed €100,000 during a given fiscal year. This threshold is calculated separately for each transaction type and does not allow for offsetting between revenues and expenses. What to know more about Transfer Pricing Requirements for International Businesses? Read our dedicated blog! In conclusion, transfer pricing documentation is essential for international businesses in France to demonstrate compliance with tax laws and avoid heavy penalties. By meeting the local requirements and aligning with OECD standards, companies can ensure transparency and reduce audit risks.

Transfer Pricing for International Business in France

Transfer pricing for international businesses is a crucial area of tax compliance that affects multinational companies operating across borders. For multinational companies in France, complying with transfer pricing rules in France is essential to avoid costly penalties and disputes. This blog provides an overview of key transfer pricing concepts, explains why transfer pricing is important, and summarizes the OECD transfer pricing methods that guide multinational businesses worldwide. What is Transfer Pricing? Transfer pricing refers to the pricing of transactions between related entities within a multinational group. These transactions can include goods, services, intellectual property, loans, or other intercompany dealings. For multinational companies operating in France, understanding transfer pricing is critical to ensure tax compliance and avoid penalties. France’s transfer pricing rules are closely aligned with the OECD Transfer Pricing Guidelines, which serve as a global standard for setting intercompany prices. Central to these rules is the arm’s length principle.  What is the arm’s length principle? This is a concept that requires related-party transactions to be priced as if the entities were unrelated and operating under market conditions. In simpler terms, multinational companies must structure their intra-group transactions in a way that reflects the price two independent businesses would agree upon in comparable circumstances. Transfer pricing in France is applicable to all French-resident companies and includes branches of foreign entities operating in the country. This means international businesses with a presence in France must ensure their pricing strategies meet French and OECD standards. Why is Transfer Pricing Important? Non-compliance can result in significant tax adjustments, penalties, and reputational risks. Companies are allowed to make year-end transfer pricing adjustments, provided they can fully justify them. However, the French tax authority does not permit retroactive offsets between different fiscal years or between separate group entities. Penalties of non-compliance with transfer pricing rules Failure to comply with transfer pricing documentation requirements in France can lead to severe financial penalties. French entities falling within the scope of Article L. 13 AA of the French Tax Procedure Code (FTPC) are required to prepare and maintain detailed documentation to justify their intercompany transactions. If this obligation is not met, the penalties imposed can be significant. For each audited year, the penalty is calculated as the higher of: 0.5% of the amount of intercompany transactions that were omitted or insufficiently documented, or 5% of the reassessed taxable base related to those transactions.In all cases, the minimum fine is €50,000 per audited year. In addition, if a company fails to respond adequately under Article L. 13 B of the FTPC, typically related to requests for information during a tax audit, it may face a fixed penalty of €10,000 per year. There are also specific penalties associated with failure to file the 2257-SD transfer pricing return: Missing the submission deadline results in a €150 fine. Inaccuracies or omissions in the return (excluding cases of force majeure) incur a fine of €15 per error, with total penalties ranging from a minimum of €60 to a maximum of €10,000. It’s important to note that when a tax audit reveals more than €100,000 in reassessed taxes and certain penalties apply, the French Tax Authority (FTA) is obligated to refer the matter to the public prosecutor, which may lead to legal proceedings beyond tax penalties. OECD Transfer Pricing Guidelines The OECD Transfer Pricing Guidelines serve as the international benchmark for applying the arm’s length principle in in intra-group transactions. They provide a structured framework for evaluating how related-party transactions should be priced, as if they had occurred between independent entities under comparable conditions. Central to the guidelines is the selection of an appropriate pricing method, tailored to each case’s circumstances, reliability of data, and comparability. These methods fall into two main categories: traditional transaction methods and transactional profit methods. Traditional Transaction Methods Comparable Uncontrolled Price Method This technique evaluates the price charged in a controlled transaction (between related entities) by comparing it to the price applied in a comparable uncontrolled transaction (between independent parties) under similar conditions. This method is considered reliable when one of the following criteria is satisfied: The transaction in the open market is not materially affected by any differences in the circumstances of the transaction or the characteristics of the parties involved. Reasonable adjustments can be made to account for those differences and eliminate their impact on pricing.   Due to its direct approach in determining the arm’s length price, the CUP method is widely regarded as one of the most commonly applied and reliable methods in transfer pricing analysis. Resale Price Method This is categorized as a one-sided method, primarily used when a product is purchased from a related party and then resold to an independent third party. The transfer price is determined by taking the resale price to the third party and subtracting a gross margin that reflects the functions performed, risks assumed, and assets used by the reseller. This margin should align with what an independent distributor would earn in a comparable transaction. Cost Plus Method CPM is often employed when evaluating transactions involving the provision of services or the supply of tangible property, especially when such services are complex and difficult to value. This method involves identifying all costs incurred by the service provider (including both direct and indirect costs) and then adding an appropriate markup. This markup reflects the profit that a comparable independent entity would earn for performing similar functions under similar conditions. Transactional Profit Methods Transactional New Margin Method TNMM evaluates whether the amount charged in a controlled transaction is at arm’s length by comparing the net profit margin relative to an appropriate financial indicator, such as sales, assets, or costs, earned in similar uncontrolled transactions. While TNMM is commonly used due to its flexibility and applicability in many scenarios, it tends to be less accurate in situations where both parties to a transaction make distinct and significant contributions, especially when those contributions involve unique intangibles or specialized functions. Transactional Profit Split Method TPSM aims to allocate the combined profits (or losses)

Statutory Audit Requirements in France: Who Needs One and What to Expect?

This guide will walk you through the statutory audit requirements in France, including who needs to conduct an audit, the applicable thresholds and what a French audit typically involves.

Essential Tax & Accounting Obligations for a Foreign Established Firm in France

Find the two main ways a foreign company can have an established firm in France and explain the key compliance obligations that follow.

Key Tax Obligations Non-Established Firms in France Must Know (ESEFs)

Find out the key tax obligations for non-established foreign companies in France, including when you need to register for VAT, who must appoint a tax representative, and how to manage payroll and auditing requiremnts.