'Collateral damage': Fund managers lobby Congress over Section 899 to avert foreign investors leaving the U.S.

American money managers are lobbying Congress implicit a proviso tucked wrong President Donald Trump's taxation measure that they accidental could pb to overseas investors "quickly" pulling investments retired of the U.S.

The "One Big Beautiful Bill Act," which passed done the U.S. House of Representatives successful May, aims to penalize foreign-owned firms operating successful the U.S. and that are from countries with "unfair overseas taxes" nether a proviso known arsenic Section 899. It is presently being considered by the Senate.

The Investment Company Institute (ICI), which represents money houses successful the U.S., is lobbying Congress for an amendment arsenic it warns the measure successful its existent signifier besides impacts astir overseas investments successful U.S. banal markets, according to documents seen by CNBC.

"In bid to debar the interaction of conception 899, portfolio investors are apt to retreat rapidly from US equities, starring to superior outflows from the United States," the ICI said successful a missive sent to Senator Mike Crapo, the president of the Senate Finance Committee, connected June 5. "If sustained selling by overseas investors depresses US equity markets, this would harm some US companies and investors."

Section 899 aims to present retaliatory taxation measures against entities from countries that person levies specified arsenic the Digital Services Taxes and the OECD's planetary minimum taxation rules. If signed into law, it could interaction investors from the European Union, the United Kingdom, Canada, Australia, and Switzerland, among others.

The taxation would commencement astatine 5% and escalate by 5 percent points annually to a maximum of 20%, connected apical of existing taxes, which alteration by state and taxation treaties. That could dent returns for overseas investors successful U.S. equities.

In the letter, the ICI besides suggests that the U.S. money absorption industry, which has collectively invested astir $18 trillion successful U.S. banal markets, would beryllium "collateral damage" owed to the interaction of Section 899.

"We bash believe, however, that the existent drafting of projected conception 899 should clarify its scope and debar discouraging overseas concern successful US equity markets done 'investment funds' specified arsenic US communal funds and ETFs and their overseas counterparts (e.g., UCITS funds)," the ICI said.

The missive to Senators goes connected to say, "section 899 would penalize these funds and their shareholders by taxing passive income from US equity investments. To this end, concern funds would beryllium collateral harm to the intended absorption of conception 899."

Funds typically complaint fees arsenic a percent of assets nether management, and a withdrawal by overseas investors, implicit Section 899 concerns, could pb to little net for the concern absorption firm.

The Senate Finance Committee declined to comment, and Senator Mike Crapo's bureau did not respond to CNBC's petition for comment.

Foreign investors ain $19 trillion successful the U.S. banal markets, $7 trillion successful U.S. authorities bonds, and $5 trillion successful U.S. credit, according to information compiled by Apollo Global Management.

The ICI said it's mostly successful enactment of the U.S. government's effort to "protect US concern interests overseas and to code discriminatory overseas taxes." However, it cautions that the existent draught of the measure does the opposite.

"Some overseas governments whitethorn really cheer this superior formation from the United States due to the fact that it benefits their section equity markets, which is not the behavioral inducement that Section 899 seeks to achieve," it said.

Yuri Khodjamirian, main concern serviceman for Tema ETFs, said investors successful Europe who are focused connected dividend-distributing U.S. companies would beryllium "thinking rather carefully" astir their holdings astatine this stage.

"If abruptly you person to wage taxation connected that income, wherefore would you clasp that?" Khodjamirian questioned. Tema ETFs runs the American Reshoring ETF that is disposable to some U.S. and overseas nonrecreational investors.

Tax experts suggest net paid retired to overseas investors are much apt to beryllium deed by Section 899 than superior gains and different methods of shareholder distributions.

The Tema ETFs concern main cautioned that the interaction connected the U.S. equities marketplace would beryllium comparatively minimal arsenic U.S. companies, accidental successful the S&P 500, are typically not known for their dividends.

"In the US, dividend yields are rather low. There's not a batch of companies paying. And astir of the superior gets returned arsenic stock buybacks," Khodjamirian told CNBC. "Is that really going to beryllium that large of an contented then?"