Price of goods vs. royalties: what to take from the Australian PepsiCo dispute

There is frequent discussion within the EU as to whether distributors’ remuneration, which is typically expressed as a margin on sales, also includes license fees subject to withholding tax. The dispute between the Australian tax administration and the PepsiCo group therefore offers useful lessons for Czech practice as well.

An Australian court recently concluded a dispute between the tax authorities and PepsiCo. The administrator claimed that part of the price of the beverage concentrate included hidden royalties that should have been subject to withholding tax, or that it was an artificial arrangement subject to the so-called Diverted Profits Tax (DPT), a special Australian tax aimed at preventing the shifting of profits offshore.

However, courts of all instances – including the Supreme Court – have confirmed that the payments were only for the concentrate supplied. Although the trademark and recipe licences were part of the contracts, they were not separately chargeable and could not be retroactively separated from the price of the concentrate. It was also significant that all payments were made to the Australian subsidiary. Therefore, this was not income of a foreign parent company in the US, and thus could not be considered royalties subject to withholding tax.

Lessons for Czech practice

The Australian case shows several points that are also crucial for Czech companies and their relations with the financial administration:

• Distribution and franchise agreements. Within the group, everyone usually pays for the brand – either directly or indirectly. If a Czech company purchases goods from a related party and also has the right to use the brand, it is crucial to document whether the licence is separately charged or whether it is just an accompanying part of the price of the goods. If this is not clearly defined, there is a risk that the tax administration will look for a “hidden licence” in the price of the goods.
• Marketing contributions and brand promotion fees. It is advisable to keep these payments clearly separated from the price of the goods in the documentation so that it is clear what they are for. If their purpose is not sufficiently explained, the tax administrator may argue that it is in fact a licence fee.
• Burden of proof and documentation. The tax authorities must be able to prove that a license payment would actually have been made in a normal business setting. In practice, however, it is clear that the main responsibility lies with the business entities – i.e. their contractual documentation and transfer pricing documentation. These materials should be prepared in advance, taking this type of risk into account, and clearly define what constitutes the price of the goods and what constitutes a possible license.

It is therefore essential for Czech companies to have well-drafted contracts. This means not only clearly defining the price of goods and any license fees, but also separating marketing contributions, keeping clear records of financial flows, and verifiably defining the roles of individual companies within the group. This is the only way to avoid disputes over whether the price of goods includes hidden royalties.