Tax Treaty Case Law around the Globe 2024

19.1. Introduction

Over the last few years, the Australian Government has been focused upon combatting arrangements aimed at avoiding Australia’s withholding tax rules in relation to royalty payments. This included a proposal to disallow deductions for payments made by an Australian subsidiary where the price of tangible goods and/or services includes a royalty element which is not separately recognized as a royalty (although it has the characteristics of one, i.e. an “embedded royalty”) and/or that a royalty element may be paid by a person without a taxable presence in Australia or to persons located in low or no tax jurisdictions, usually to avoid Australian tax.

Although the Government decided not to proceed with this measure on 14 May 2024, the Australian Taxation Office (ATO) has been active in issuing Tax Alerts and a draft Tax Ruling setting out its concerns and actively engaging in compliance action. Compliance action in respect of such suspected activity has led to the Federal Court of Australia’s (FCA) decision in PepsiCo. Inc v Commissioner of Taxation. The Federal Court was asked to consider the operation of Australia’s existing domestic royalty rules (under section 128B ...