Latest news with #DigitalServicesTaxes
CNBC
3 hours ago
- Business
- CNBC
'Collateral damage': Fund managers lobby Congress over Section 899 to avert foreign investors leaving the U.S.
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." 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. 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." 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. 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 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 to share buybacks," Khodjamirian told CNBC. "Is that actually going to be that big of an issue then?"
CNBC
a day ago
- Business
- CNBC
Why the U.S. tax bill's Section 899 could push European firms to list in the U.S.
The decision by U.K. fintech firm Wise to move its primary stock listing to the U.S. is the latest in a series of blows to the London market — and a new provision tucked inside a U.S. tax bill could make things even worse. Section 899 of President Donald Trump's spending bill, which passed the House of Representatives in May, threatens to penalize foreign-owned firms domiciled in countries with "unfair foreign taxes," and experts say it could accelerate the trend for European companies to hop the pond. The provision introduces retaliatory tax measures against corporations and other entities from countries that have levies such as the Digital Services Taxes and the OECD's global minimum tax rules. The list of affected nations would include most European Union members, the United Kingdom, Canada, Australia, and Switzerland, among others. For publicly traded companies, Section 899 imposes a new withholding tax on U.S.-sourced income for any foreign corporation that is more than 50% owned by non-U.S. entities. 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 earnings for companies in the Stoxx Europe 600 index, for instance, by up to 2% in the first year, and as much as 5% over four years, according to Goldman Sachs analysts. How can European firms avoid Section 899? The Wall Street bank has identified a U.S. re-listing as one of many measures that companies could take if the bill becomes law. A listing in the U.S. would provide a direct path to increasing a company's base of American investors, according to Goldman. This would help companies push their non-U.S. ownership below the critical 50% threshold, taking them out of Section 899's scope. While there are many U.K. companies with high exposure to the U.S. with a majority-U.S. shareholder base, Goldman Sachs identified consumer credit rating firm Experian and Hikma Pharmaceuticals , among others, as two FTSE 100 companies with more than half their group revenues in the U.S. but falling below the 50% threshold for U.S. ownership. The Wall Street bank suggested that such companies could use a U.S. listing as one avenue to avoid taxes imposed by Section 899. Tax experts cautioned that to avoid the impact of Section 899, it would require significantly more work than simply relisting in the U.S. with an attempt to gain U.S. shareholders. "I'm not sure that listing alone would be sufficient," said a senior executive at a large European firm with extensive operations in the U.S., who asked not to be named as they were not authorized to comment on the issue. "The proposed language [in the bill] includes a vote or value test for U.S. ownership, including publicly traded companies, and seems to say that if a company [falls under Section 899 tax] for even one day then it is for the year." The executive also questioned whether companies will be able to identify beneficial owners — or the actual owners that control a business — "with any degree of confidence." That's because the tax bill includes "a look-through concept" — which means U.S. fund managers investing on behalf of foreign clients would not count toward the exemption requirements. "The monitoring [of the shareholder register] alone would be resource intensive," the executive added. Others point out that if European governments dropped what Trump calls their "unfair foreign tax" policies, their companies would automatically be exempted from 899. "Hill Republicans see section 899 not as a revenue-generating measure, but as a tool that gives the Treasury Department additional leverage in negotiations with other countries to encourage changes in behavior," Pat Brown, a tax expert at the consultancy PwC U.S., told CNBC. "Foreign-headquartered companies considering changes in their capital structure to reduce the impact of section 899 would need to consider that the government of their home country could, with the stroke of a pen, eliminate the need to consider section 899 as an issue," Brown added. Exacerbating a corporate-migration trend Goldman Sachs also highlighted that Section 899 could also act as a powerful incentive to a corporate migration trend that is already underway. For years, European and U.K. companies have felt disadvantaged by their home markets, a sentiment that has led to a steady flow of buyouts and re-listings elsewhere. Companies have repeatedly pointed to the valuation discount that European equities suffer compared to their U.S. peers to justify their decisions to move their listing to the U.S. Wise debuted on London's stock market in 2021 in a direct listing that valued the company at £8 billion ($10.84 billion) at the time. It is now valued at £11.07 billion, according to LSEG data. Since then, London has been mired in doubts over whether it can play host to major tech listings. The market is often criticized for lacking the depth of liquidity and industry expertise from investment analysts to accommodate such transactions. Doubts over London's stock market haven't been limited to tech, though. Last week, Glencore -backed metals investor Cobalt Holdings announced it was scrapping plans to go public in London. The IPO was expected to be the largest listing in the U.K. capital since early 2024. A spokesperson for London Stock Exchange Group (LSEG) told CNBC last week that London remains the top European exchange in terms of capital raised and the total market cap of the companies listed. They added that they had seen a "noticeable increase in interest from international companies in coming to London with many starting to prepare." — CNBC's Ryan Browne contributed reporting.
NBC News
30-05-2025
- Business
- NBC News
U.S. foreign tax bill sends jitters across Wall Street
While U.S. President Donald Trump's tariffs play out in U.S. courts, another one of his proposed laws could weaponize the American tax system. Investment banks and law firms warn this step could prove to be as significant as the impact of duties on investors. The 'One Big Beautiful Bill Act,' which passed through the U.S. House of Representatives last week, includes the most sweeping changes to the tax treatment of foreign capital in the U.S. in decades under a provision known as Section 899. The bill must still gain the Senate's approval. 'We see this legislation as creating the scope for the US administration to transform a trade war into a capital war if it so wishes,' said George Saravelos, global head of FX research at Deutsche Bank on Thursday. 'Section 899 challenges the open nature of US capital markets by explicitly using taxation on foreign holdings of US assets as leverage to further US economic goals,' Saravelos added in the note to clients, under the subtitle 'weaponization of US capital markets in to law.' Section 899 says it will hit entities from 'discriminatory foreign countries' — those that impose levies such as the digital services taxes that disproportionately affect U.S. companies. France, for instance, has a 3% tax on revenues from online platforms, which primarily targets big technology firms such as Google, Amazon, Facebook, and Apple. Germany is reportedly considering a similar tax of 10%. What does the proposed tax do? Under the new tax bill, the U.S. would hit investors from such countries by increasing taxes on U.S. income by 5 percentage points each year, potentially taking the rate up to 20%. Emmanuel Cau, head of European Equity Strategy at Barclays, suggested that the mere passage of the tax legislation could make dollar assets less valuable for foreign investors. 'In our view, this is a risk for those companies generating US revenues, and domiciled in countries that have enacted Digital Services Taxes (DST) or are implementing the OECD's Under Taxed Payment Rule (UTPR),' Cau said in a Friday note to clients. He highlighted companies such as London-listed Compass Group, which provides catering services to U.S. schools, and InterContinental Hotels, which owns at least 25 luxury hotels in the U.S., are likely to be affected by the proposed law. 'Given US net international investment position is sharply negative, there is indeed scope for capital outflows if indeed S899 passes through the Senate in its current form,' he added. The impact of the bill won't be limited to European companies or individuals from those states. The bill 'could significantly increase tax rates applicable to certain non-U.S. individuals and business, governmental, and other entities,' said Max Levine, head of U.S. tax at the law firm Linklaters. This means it could also ensnare governments and central banks, which are large investors of U.S. Treasuries. France and Germany, for instance, held a combined $475 billion worth of U.S. government bonds as of March. The proposed tax would lower returns on U.S. Treasuries for those investors as 'the de facto yield on US Treasuries would drop by nearly 100bps,' Deutsche Bank's Saravelos added. 'The adverse impact on demand for USTs and funding the US twin deficit at a time when this is most needed is clear'. 'It's very bad,' said Beat Wittmann, chairman of Switzerland-based Porta Advisors. 'This is huge — this is just one piece in the overall plan and it's completely consistent with what this administration is all about.' 'The ultimate judge for this is not our opinions, it's the bond market,' Wittmann added. 'The U.S. bond market is discounting these developments, and we have seen in the last few weeks, that if there was a safe haven move, investors clearly prefer German bunds.' Large Australian pension funds with U.S. investments have also been reportedly concerned by the bill, since Australia operates a medicines subsidy scheme that is opposed by large U.S. pharmaceutical companies. Legal experts at the Mayer Brown law firm suggest that 'significant changes' could be made to the bill as it passes through the U.S. Senate before it's enshrined into law by Trump. 'As such, there may be questions about whether the provisions of the proposal that override tax treaties could be included in the US Senate's version of the tax bill,' Mayer Brown's experts said.
CNBC
30-05-2025
- Business
- CNBC
U.S. foreign tax bill sends jitters across Wall Street
While U.S. President Donald Trump's tariffs play out in U.S. courts, another one of his laws could weaponize the American tax system. Investment banks and law firms warn this step could prove to be as significant as the impact of duties on investors. The "One Big Beautiful Bill Act," which passed through the U.S. House of Representatives last week, includes the most sweeping changes to the tax treatment of foreign capital in the U.S. in decades under a provision known as Section 899. The legislation must still gain the Senate's approval. "We see this legislation as creating the scope for the US administration to transform a trade war into a capital war if it so wishes," said George Saravelos, global head of FX research at Deutsche Bank on Thursday. "Section 899 challenges the open nature of US capital markets by explicitly using taxation on foreign holdings of US assets as leverage to further US economic goals," Saravelos added in the note to clients, under the subtitle "weaponization of US capital markets in to law." The Section 899 bill says it will hit entities from "discriminatory foreign countries" — those that impose levies such as the digital services taxes that disproportionately affect U.S. companies. France, for instance, has a 3% tax on revenues from online platforms, which primarily targets big technology firms such as Google, Amazon, Facebook, and Apple. Germany is reportedly considering a similar tax of 10%. Under the new tax bill, the U.S. would hit investors from such countries by increasing taxes on U.S. income by 5 percentage points each year, potentially taking the rate up to 20%. Emmanuel Cau, head of European Equity Strategy at Barclays, suggested that the mere passage of the tax legislation could make dollar assets less valuable. "In our view, this is a risk for those companies generating US revenues, and domiciled in countries that have enacted Digital Services Taxes (DST) or are implementing the OECD's Under Taxed Payment Rule (UTPR)," Cau said in a Friday note to clients. He highlighted companies such as London-listed Compass Group, which provides catering services to U.S. schools, and InterContinental Hotels, which owns at least 25 luxury hotels in the U.S., are likely to be affected by the proposed law. "Given US net international investment position is sharply negative, there is indeed scope for capital outflows if indeed S899 passes through the Senate in its current form," he added. The impact of the bill won't be limited to European companies or individuals from those states. The bill "could significantly increase tax rates applicable to certain non-U.S. individuals and business, governmental, and other entities," said Max Levine, head of U.S. tax at the law firm Linklaters. This means it could also ensnare governments and central banks, which are large investors of U.S. Treasuries. France and Germany, for instance, held a combined $475 billion worth of U.S. government bonds as of March. The proposed tax would lower returns on U.S. Treasuries for those investors as "the de facto yield on US Treasuries would drop by nearly 100bps," Deutsche Bank's Saravelos added. "The adverse impact on demand for USTs and funding the US twin deficit at a time when this is most needed is clear". "It's very bad," said Beat Wittmann, chairman of Switzerland-based Porta Advisors. "This is huge — this is just one piece in the overall plan and it's completely consistent with what this administration is all about." "The ultimate judge for this is not our opinions, it's the bond market," Wittmann added. "The U.S. bond market is discounting these developments, and we have seen in the last few weeks, that if there was a safe haven move, investors clearly prefer German bunds." Large Australian pension funds with U.S. investments have also been reportedly concerned by the bill, since Australia operates a medicines subsidy scheme that is opposed by large U.S. pharmaceutical companies. Legal experts at the Mayer Brown law firm suggest that "significant changes" could be made to the bill as it passes through the U.S. Senate before it's enshrined into law by Trump. "As such, there may be questions about whether the provisions of the proposal that override tax treaties could be included in the US Senate's version of the tax bill," Mayer Brown's experts said.
