Lawmakers Warn BEAT Has Adverse Effect on American Companies

July 26, 2019

The Honorable Steven Mnuchin
Secretary of the Treasury
1500 Pennsylvania Avenue
Washington, D.C. 20220

Dear Secretary Mnuchin:

We write to you regarding the Base Erosion and Anti-Abuse Tax (BEAT) and the inadvertent adverse impacts this new tax is having on American companies, specifically companies that operate under the captive finance model. We have been made aware of this issue by Canon USA, headquartered in Melville, NY and Canon Financial Services headquartered in Mount Laurel, NJ. Canon offers leasing options to consumers through Canon Financial Services, a captive finance subsidiary of Canon USA.

Captive finance companies have significant advantages that can help to drive sales and revenue, this increases tax liability, ultimately increasing the U.S. tax base. As you know, the BEAT was intended to keep U.S. companies from avoiding tax liability by using offshore parent corporations. We believe in the intent of this tax and fully support combatting against the use of offshore parent companies to avoid tax liability by making deductible payments to a foreign parent.

We don't believe it was the intent of Congress to apply BEAT to this type of captive finance company, especially when many of these companies are subject to stand alone agreements with the IRS to ensure they are paying their fair share of taxes, companies like Canon USA. The issue with BEAT arises when depreciation deductions taken on leased assets to end users by captive finance companies are considered "base erosion tax benefits," thereby triggering a requirement to add these deductions back for purposes of BEAT. This is the case even though these leasing or financing arrangements create U.S. taxable income in excess of any depreciation deductions, and in spite of the fact that the value of the deductions are typically passed on to US customers in the form of lower financing costs.

We believe the BEAT results in disparate and inequitable treatment for the captive finance model and imposes an unjust burden that does not affect non-captive finance companies. We respectfully request Treasury expand its definition of "reduction of gross receipts" under IRS regulation to exclude depreciation as a base erosion payment for captive finance companies and allow cash-basis rental payments to be netted against the adjustment for depreciation in calculating BEAT. We believe that doing so would put an end to the inadvertent impacts this tax has placed on companies with captive finance models. We appreciate your consideration of this letter when formulating the final regulation.

Thank you for your attention to this matter. If you have any questions, please do not hesitate to contact us.

Respectfully,

PETER T. KING
Member of Congress

THOMAS R. SUOZZI
Member of Congress

ANDY KIM
Member of Congress

BILL PASCRELL
Member of Congress