In 1998, while most Americans were filing their tax returns and writing checks to Uncle Sam, PepsiCo—one of the world's largest food and beverage companies—was heading to the mailbox for a very different reason. Instead of paying federal income taxes, the corporation received $494 million in tax benefits.

This wasn't the result of a failing business or financial losses. PepsiCo was profitable. The massive tax benefit came from a settlement with the IRS over earlier years' tax issues, combined with generous federal tax credits for operating in Puerto Rico.

The Puerto Rico Tax Loophole

For decades, Section 936 of the U.S. tax code allowed American corporations to avoid federal taxes on profits earned in Puerto Rico. Companies like PepsiCo set up manufacturing operations on the island, and the profits they made there were essentially tax-free at the federal level.

The idea was to boost Puerto Rico's economy by attracting mainland investment. In practice, it became one of the most lucrative corporate tax shelters in American history. Pharmaceutical companies, tech firms, and food manufacturers—including PepsiCo—reaped billions in tax savings.

Not Just PepsiCo

PepsiCo wasn't alone in getting a tax rebate that year. A landmark study by the Institute on Taxation and Economic Policy found that in 1998, 24 major corporations received tax rebates totaling $1.3 billion despite reporting $12 billion in pre-tax U.S. profits.

General Motors received a rebate
Texaco got money back
Enron was on the list (yes, that Enron)
Even Goodyear and Northrop Grumman cashed checks from the Treasury

These companies didn't break any laws. They used perfectly legal tax credits, deductions, and loopholes written into the tax code by Congress.

How Does a Profitable Company Pay Negative Taxes?

When your effective tax rate goes below zero, you've entered a special realm of corporate finance. Here's how it works:

Tax credits reduce your tax bill dollar-for-dollar (not just reducing taxable income, but the actual tax owed)
Carrybacks and carryforwards let companies apply losses from one year to offset profits in another
Accelerated depreciation allows massive deductions for equipment and facilities
Foreign tax credits can exceed actual U.S. tax liability in some cases

Stack enough of these together, and you don't just pay zero—the government writes you a check.

The Aftermath

Section 936 was phased out starting in 1996, but companies that had already established Puerto Rico operations got a 10-year transition period. That's why PepsiCo was still benefiting in 1998.

The complete elimination of Section 936 contributed to Puerto Rico's economic decline in the 2000s, as many pharmaceutical and manufacturing companies pulled out. The island that once hosted hundreds of mainland factories saw massive job losses.

As for PepsiCo? The company continued to thrive. By 2024, it had revenues exceeding $91 billion annually. And while corporate tax avoidance strategies have evolved, the game hasn't fundamentally changed—just the loopholes used to play it.

Related Tags