Tax experts say the Australian Tax Office plan to pursue tech giants for billions of dollars of alleged royalty payments is dead following a comprehensive High Court defeat this month. But the government agency is still reviewing its position following the judgment.

The court determined that the sale of soft drink concentrate between a PepsiCo affiliate and its Australian bottler Schweppes did not contain royalty payments, which would then have been subject to additional tax. The tax office had said part of the transaction should reflect an intellectual property payment, not just payment for the syrup concentrate.

The ATO was awaiting the outcome of this court decision before deciding whether it would pursue a similar royalty withholding tax argument to pursue billions of dollars worth of software transactions for the first time, largely targeting US tech companies.

“The ATO welcomes the High Court’s clarification of these important areas of law,” a spokesman said.

“We are currently considering this decision including any broader impact it may have on the reasoning set out in draft Taxation Ruling TR 2024/D1 Income tax: royalties – character of payments in respect of software and intellectual property rights.”

The battle began in 2011 when the ATO published a draft ruling that said a payment for software included a royalty transaction component because it included intellectual property and would be subject to the withholding tax.

Law firm Allens said it was the first case to test the ATO’s attempt to impose a royalty withholding tax and a diverted profits tax on payments for goods between independent parties.

“It provides greater tax certainty for multinational groups engaged in cross-border transactions, most notably those in the pharmaceutical, technology and manufacturing industries,” it said.

Arnold Bloch Leibler’s taxation specialist Shaun Cartoon said the path forward for the ATO was clear. “The case shows that the Australian Taxation Office can’t wish a royalty into being where none exists. It is a win for freedom of contracting and a dead end for the ATO after many years of battle,” he said.

The ATO’s original draft ruling for the tax has been described by US trade groups such as the US National Foreign Trade Council as “gross overreach”.

“We’re delighted to see the opinion of the High Court reinforce that this transaction should be respected. We hope this decision signals to the ATO that it should reassess its approach to other similar transactions, including the highly problematic treatment of embedded royalties in the software directive,” US trade council head of international tax policy Anne Gordon said after the court judgment last week.

The 2021 draft ruling drew fire from the all-powerful US Treasury, which last year said the proposal would “create a concerning imbalance in the benefits provided under the Australia tax treaty”.

The stakes rose considerably with the election of US President Donald Trump. On the first day of his presidency, Trump threatened punitive new taxes if countries levied “discriminatory or extraterritorial” taxes against US companies.

Trump turned up the pressure recently with plans for a so-called “revenge tax” that would punish any country with tax policies that were seen to discriminate against US companies. This tax provision was removed from legislation before it was approved by US lawmakers.

But the threat of punitive action remains, as shown by Trump’s recent proposal to put tariffs of up to 250 per cent on pharmaceutical imports to help lower drug prices in the US.

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