American fund managers are lobbying Congress for provisions hidden within President Donald Trump’s tax bill.
The “One Big Beautiful Bill Act,” which passed the US House of Representatives in May, comes from a country that is punished by foreign-owned businesses operating in the US and has “unfair foreign taxes” under a provision known as Section 899. It is currently being considered by the Senate.
According to documents seen by CNBC, the Institute of Investment Companies (ICI), which represents US fundhouses, is lobbying Congress for revisions as the bill, in its current form, also affects most foreign investments in the US stock market.
“To avoid the impact of Section 899, portfolio investors are likely to retreat quickly from US stocks, leading to capital outflows from the US,” ICI said in a letter sent on June 5th to Sen. Mike Krapo, chairman of the Senate Treasury Committee.
What does Section 899 do?
Taxes start at 5% and escalate to up to 20% per year, in addition to existing taxes, as well as existing taxes that vary by country and tax treaty. It could potentially reduce returns for foreign investors in US stocks.
Carelessness
In the letter, ICI also suggests that the US fund management industry, which collectively invested around $18 trillion in the US stock market, will be “collateralized losses” due to the effects of Section 899.
“However, I believe that the current drafting of the proposed section 899 should clarify its scope and avoid blocking foreign investment in the US stock market through “investment funds” such as US mutual funds and ETFs and their foreign counterparts (such as the UCITS funds),” ICI said.
The letter to the Senator continues, “Section 899 will be punished by these funds and their shareholders by taxing passive income from US stock investments. For this purpose, the investment fund will be a collateral loss to the intended focus of Section 899.”
A letter from ICI sent to the Senate Finance Committee seen by CNBC.
Funds usually charge a fee as a percentage of assets under management, and withdrawal by foreign investors for section 899 concerns could reduce the investment management company’s revenue.
The Senate Finance Committee declined to comment, and Senator Mike Krapo’s office did not respond to CNBC’s request for comment.
Foreign investors own $19 trillion in the US stock market, $7 trillion in US government bonds and $5 trillion US credits, according to data compiled by Apollo Global Management.
The ICI said it “is primarily support the US government’s attempts to protect US business interests overseas and address discriminatory foreign taxes, but it warns that the current draft of the bill will oppose it.
“Some foreign governments may actually support this capital flight from the US to benefit local stock markets.
“Why do you keep it?” US stocks?
Tema ETFS Chief Investment Officer Yuri Khodjamirian said European investors, who are focused on dividends from US companies, are “thinking very carefully” about holdings at this stage.
“If you suddenly have to pay taxes on that income, why do you keep it?” Khodjamirian asked. Tema ETF runs American Reshoring ETF This is available to both US and foreign professional investors.
Tax experts suggest that revenue paid to foreign investors is more likely to be hit by Section 899 than capital gains or other shareholder distribution methods.
Tema ETFS Investment Chief warned that, like US companies, the impact on the US stock market is relatively minimal. S&P 500is not usually known in dividends.
“In the US, dividend yields are very low. There are no companies paying for them, and most of the capital is returned as a repurchase of shares,” Khodjamirian told CNBC. “Is that actually such a big problem?”
