Investors rally support for amendment to foreign tax section in Trump's budget bill

Industry groups from real estate, finance, and multinational companies are pushing for a retaliatory tax on foreign investors in the US to be reduced or taken out of the Republican tax bill known as Section 899. According to them, it is a threat to their businesses, the economy, and markets as a whole.

Section 899 of the proposed tax applies a progressive tax burden of up to 20% on the US income of foreign companies. This is meant to punish countries that tax things like digital services in ways the US considers unfair. 

The measure targets most EU countries, the UK, Australia, Canada, and others around the world would be affected, according to law firm Davis Polk. 

However, the asset management industry is concerned about outflows. The new levy is feared to increase taxes from rents and real estate investment trusts, gains from property sales, and securitized products. 

David McCarthy, managing director at the CRE Finance Council, a nonpartisan trade group, said that it could depress the value of real estate. This is if there is a shortage of money to finance property purchases.

In addition, a spokesperson for the Investment Company Institute said, “We encourage the Senate to make this provision more targeted to respond to unfair foreign taxes and other concerning measures rather than disincentivizing beneficial foreign investment in the US.” 

 200 foreign-owned companies face uncertain futures

The president of the Global Business Alliance, Jonathan Samford, told the FT that this week, members of Congress would meet with representatives from about 70 companies. Section 899 would be a central topic of their talks.

The fear of higher taxes has made the almost 200 foreign-owned companies in the US nervous. These companies include Shell, Toyota, SAP, and LVMH. Many fear that the 8.4 million jobs they create in the US will be lost.

Also, members of a major financial trade group are planning to go to Washington, D.C., to meet with Treasury officials and Republican members of the Senate Banking Committee to argue against Section 899.

Beth Zorc, chief executive of the Institute of International Bankers, said: “As passed by the US House of Representatives, Section 899 will stifle foreign direct investment, risk financial market disruptions, and endanger American jobs in states and communities across the country.”

The IIB has also argued its case. They said that foreign banks’ operations in the US back more than 70% of all debt issued by foreign companies in the US. This is almost a third of all debt issued in US dollars.

The foreign banks said they lent more than $1.3 trillion to US companies in 2023. They also said that their loans to international companies helped foreign-headquartered companies spend $5.4 trillion in the US. This brought in $270 billion.

Clients put a pause on planned investments in the US

The US Treasury International Capital Reporting System says foreign buyers hold nearly $40 trillion in US assets, such as bonds, loans, and deposits. Therefore, for foreign investors, Section 899 would increase taxes on dividends and interest on US stocks and some corporate bonds by 5% annually for four years. 

If it goes through multinational businesses and the free flow of capital from the US, it could be very bad, said Gabriel Grossman, a US tax partner at Linklaters. He also said that some clients have paused planned investments in the US until they know more about the new taxes.

It would also impose taxes on the American portfolio holdings of sovereign wealth funds, which are currently exempt. According to the non-partisan Joint Committee on Taxation, Section 899 would raise $116bn over the next decade. Still, the overall bill would add $2.4 trillion to the US debt by 2034, according to the Congressional Budget Office.

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