PepsiCo - the end of customs value unbundling in Australia?

The High Court’s ruling in Commissioner of Taxation v PepsiCo, Inc [2025] HCA 30 (PepsiCo case) serves as a reminder for multinationals and importers that structuring payments may eliminate one tax risk while simultaneously creating another.

Including all costs in the price of goods may unnecessarily inflate customs values and customs duties.

Excluding certain costs and rights from the price and paying those separately, while reducing the customs value and duties, may give rise to withholding taxes.

Customs duty on unbundled costs

Customs valuation planning is a long-used strategy by importers to legally reduce the dutiable value of goods. Based on the provisions in the World Trade Organization Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994, which outlines what goods-related costs are dutiable, and broadly what are not, each member country has put these provisions into their customs laws.

In Australia, Division 2 of Part XVI of the Customs Act 1901 (Cth), provides the strict parameters of what must be added and what can be deducted from the price of goods to determine a customs value.  Importantly, just because amounts are not required to be added to the price, it does not mean they can be deducted if they are included in the price of the goods.

Where the cost of intellectual property (IP) is included in the price of the goods, it cannot be deducted. However, certain IP is not required to be added to the price to obtain a customs value, meaning the customs value of the goods is reduced. 

In some instances, where the intellectual property attracts a royalty or a licence fee there may be royalty withholding tax to be paid on that fee.

Background of the PepsiCo dispute

On 13 August 2025, the High Court of Australia handed down its judgement in the PepsiCo case in favour of the taxpayer (PepsiCo, Inc), in its long running dispute with the Commissioner of Taxation over embedded royalties.

The High Court’s majority decision affirms the Full Federal Court’s decision in PepsiCo, Inc v Commissioner of Taxation [2024] FCAFC 86. The case centred on whether payments made by Schweppes Australia Pty Ltd (SAPL) to a PepsiCo affiliate in Australia (PepsiCo Bottling Singapore P/L (PBS)) under Exclusive Bottling Agreements (EBAs) between PepsiCo and SAPL contained embedded royalties for PepsiCo’s IP.

Under the EBAs, SAPL acquired concentrate directly from PBS, which sourced the concentrate from a PepsiCo affiliate (Concentrate Manufacturing (Singapore) Pte Ltd (CMS)), and held the exclusive right to bottle, sell, and distribute branded beverages in Australia. The Commissioner contended that part of the consideration paid for the concentrate included a royalty for the use of PepsiCo’s trademarks and other IP. However, the High Court rejected that claim, finding that the sale under the EBAs was solely for the concentrate, and the payments did not include any royalty component. As a result, there were no royalty withholding tax and diverted profits tax liabilities.

Customs implications of the High Court’s decision

Businesses should not overlook the customs valuation consequences of how the prices of imported goods are structured. Particularly as the price forms the basis for calculating any customs duty goods and service tax (GST), wine equalisation tax (WET) or luxury car tax (LCT) payable at import.

Costs such as marketing and management support, the right to distribute, use a trademark and manufacture goods in Australia (as examples) are generally not required to be added to the customs value. Royalties and licence fees are generally only required to be added to the customs value where they are paid in accordance with the import sales transaction, unless the fees:

• Do not relate to the imported goods,
• Are only incidental to the goods,
• Are for the right to manufacture in Australia, or
• Are for post-importation support.

It should be noted that this does not preclude some royalties from being production assist costs, which are required to be added to the customs value.

Importantly where these costs are included in the price for the underlying goods they cannot be deducted. Therefore, whether the price paid by SAPL under the EBAs, or the price paid by PBS to CMS, was considered to have embedded royalties has no bearing on the customs value of the goods as there is no legislative ability to deduct them and reduce the customs value.

What’s next for customs unbundling

PepsiCo shows us the importance of engaging professional tax and customs advisors to provide, clear advice across all probable tax outcomes of goods pricing.  All fees outside of the price of goods, should be clearly documented in legal agreements to substantiate, not only the substance, but the form of the arrangements between the parties.

How BDO can help

BDO combines expertise in income tax, transfer pricing, customs and international trade to provide end-to-end advice to our clients. Contact us today to discuss how we can support your business.