Tough Australian Tax Weapon Gets Court's Go-Ahead

Australian authorities continue to crack down on multinational companies it believes are trying to avoid Australian taxes—and a recent court ruling against PepsiCo Inc. gives them a tough weapon.

A judge ruled in November that sales of beverage concentrate from a Singapore Pepsi affiliate to an Australian Pepsi bottler also effectively included royalties for the use of Pepsi trademarks and intellectual property that the company should have been taxed on. But for the first time, the judge also blessed the use of Australia’s “diverted profits tax,” or DPT, which slams companies with a 40% tax rate if they’re orchestrating their transactions to obtain tax benefits.

PepsiCo, which is appealing the ruling, didn’t have to pay the DPT itself, since the judge ruled that royalty withholding taxes apply to it instead. But the harsh tax could be used against other big multinationals that rely on trademarks, patents, and other intellectual property as a key part of their business, like pharmaceutical and technology companies.

Bloomberg Tax senior reporter Michael Rapoport spoke with Angela Wood, a partner at Clayton Utz in Melbourne, about the PepsiCo ruling, its potential effects, and what companies should do to cope with it.

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