American fund managers are lobbying Congress over a provision tucked inside President Donald Trump’s tax bill that they say could lead to foreign investors “quickly” pulling investments out of the U.S.
The “One Big Beautiful Bill Act,” which passed through the U.S. House of Representatives in May, aims to penalize foreign-owned firms operating in the U.S. and that are from countries with “unfair foreign taxes” under a provision known as Section 899. It is currently being considered by the Senate.
The Investment Company Institute (ICI), which represents fund houses in the U.S., is lobbying Congress for an amendment as it warns the bill in its current form also impacts most foreign investments in U.S. stock markets, according to documents seen by CNBC.
“In order to avoid the impact of section 899, portfolio investors are likely to retreat quickly from US equities, leading to capital outflows from the United States,” the ICI said in a letter sent to Senator Mike Crapo, the chairman of the Senate Finance Committee, on June 5. “If sustained selling by foreign investors depresses US equity markets, this would harm both US companies and investors.”
What does Section 899 do?
Section 899 aims to introduce retaliatory tax measures against entities from countries that have levies such as the Digital Services Taxes and the OECD’s global minimum tax rules. If signed into law, it could impact investors from the European Union, the United Kingdom, Canada, Australia, and Switzerland, among others.
The tax would start at 5% and escalate by five percentage points annually to a maximum of 20%, on top of existing taxes, which vary by country and tax treaties. That could dent returns for foreign investors in U.S. equities.
Inadvertent impact
In the letter, the ICI also suggests that the U.S. fund management industry, which has collectively invested around $18 trillion in U.S. stock markets, would be “collateral damage” due to the impact of Section 899.
“We do believe, however, that the current drafting of proposed section 899 should clarify its scope and avoid discouraging foreign investment in US equity markets through ‘investment funds’ such as US mutual funds and ETFs and their foreign counterparts (e.g., UCITS funds),” the ICI said.
The letter to Senators goes on to say, “section 899 would penalize these funds and their shareholders by taxing passive income from US equity investments. To this end, investment funds would be collateral damage to the intended focus of section 899.”
Letter from ICI sent to Senate Finance Committee, seen by CNBC.
Funds typically charge fees as a percentage of assets under management, and a withdrawal by foreign investors, over Section 899 concerns, could lead to lower earnings for the investment management firm.
The Senate Finance Committee declined to comment, and Senator Mike Crapo’s office did not respond to CNBC’s request for comment.
Foreign investors own $19 trillion in the U.S. stock markets, $7 trillion in U.S. government bonds, and $5 trillion in U.S. credit, according to data compiled by Apollo Global Management.
The ICI said it’s largely in support of the U.S. government’s attempt to “protect US business interests overseas and to address discriminatory foreign taxes.” However, it cautions that the current draft of the bill does the opposite.
“Some foreign governments may actually cheer this capital flight from the United States because it benefits their local equity markets, which is not the behavioral incentive that Section 899 seeks to achieve,” it said.
‘Why would you hold’ U.S. stocks?
Yuri Khodjamirian, chief investment officer for Tema ETFs, said investors in Europe who are focused on dividend-distributing U.S. companies would be “thinking quite carefully” about their holdings at this stage.
“If suddenly you have to pay tax on that income, why would you hold that?” Khodjamirian questioned. Tema ETFs runs the American Reshoring ETF that is available to both U.S. and foreign professional investors.
Tax experts suggest earnings paid out to foreign investors are more likely to be hit by Section 899 than capital gains and other methods of shareholder distributions.
The Tema ETFs investment chief cautioned that the impact on the U.S. equities market would be relatively minimal as U.S. companies, say in the S&P 500, are typically not known for their dividends.
“In the US, dividend yields are quite low. There’s not a lot of companies paying. And most of the capital gets returned as share buybacks,” Khodjamirian told CNBC. “Is that actually going to be that big of an issue then?”
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