Illinois’ Tax Win Over Pepsi Shows Abuse of Profit-Shifting Rule

The Illinois Department of Revenue’s recent court victory over soft-drink giant Pepsi for what it called “shameful and egregious” tax avoidance put the spotlight on an arcane rule that creates opportunities for multinational companies to shift their US profits offshore.

A Sangamon County Circuit judge ruled Jan. 9 that PepsiCo Inc. had improperly characterized its snack food subsidiary, Frito-Lay North America Inc., as an excluded foreign company under the state’s “80/20 rule.”

Under 80/20 provisions, a domestic corporation that keeps at least 80% of its property and payroll located overseas can be excluded from the “water’s edge” combined income tax ...