Why the 80/20 Rule Is Crucial
Under the 80/20 rule, a parent company can exclude a domestic subsidiary from its state tax return if that unit has 80% of its property and payroll overseas. PepsiCo leaned on this rule to exclude Frito-Lay, arguing that expatriate wages paid through PGM should count toward the 80%.
But the courts rejected that, agreeing with the Department of Revenue that the expatriates were not truly employees of PGM, and therefore couldn’t be used to satisfy the foreign payroll requirement. The economic substance doctrine — which invalidates tax arrangements lacking genuine business purpose — was applied to deny the deduction.
PepsiCo insists this was the wrong test and a dangerous overreach, warning that the ruling “has the potential to dismantle long-standing, globally accepted employment models.”
A Clash of Legal Standards
PepsiCo also blasted the appellate court’s reliance on what it called a “clearly erroneous standard,” arguing that it contradicts Illinois Supreme Court precedent and misaligns with decisions from other appellate districts. The company contends the court failed to give weight to the functional and contractual roles of PGM, oversimplifying a complex corporate structure.
“This isn’t a tax trick — it’s a mechanism for global talent mobility,” PepsiCo said.
The company also warned that prospective expatriates may be dissuaded from participating in international assignments if their employment status is suddenly uncertain in the eyes of tax regulators.
