New tax provision risks deterring global investors in U.S.
The provision in the law allowing for additional taxation of foreign investments in the U.S. is raising concern in financial markets. Experts suggest this regulation could deter foreign investors at a time when the United States is particularly reliant on foreign capital to finance its increasing national debt.
The provision is part of a law that has already been passed by the House of Representatives. It allows the U.S. government to apply extra taxes on companies and investors from countries considered to have restrictive tax policies toward the USA. The new regulations could impact a wide array of foreign entities, including American companies with foreign owners, international corporations with branches in the U.S., and individual investors.
Greg Peters, co-chief investment officer at PGIM Fixed Income, expressed that "This is a market-spooking event, hitting already fragile confidence, particularly from foreign investors." He also remarked that the United States is creating "self-inflicted wounds" at a time when substantial debt needs financing. "The timing is really very unfortunate," he mentioned, as quoted by the "Financial Times."
Potential consequences for the U.S. economy
The law firm Davis Polk notes that the regulations adopted by the House of Representatives will affect most EU countries, the UK, Australia, Canada, and many others worldwide. For foreign investors, this implies a 5 percentage point increase in taxes on dividends and interest from American stocks and certain corporate bonds annually for four years.
Jonathan Samford, president of the Global Business Alliance, an organization representing major foreign corporations investing in the USA, warns of "the long-term implications [that are] going to be quite severe for international companies operating in the United States." He also pointed out that this provision won't affect bureaucrats in Paris or London but will impact American workers in places like Paris, Kentucky, and London, Ohio.
Tim Adams, CEO of the Institute of International Finance, representing the world's 400 largest banks and financial institutions, stated, "at a time when the administration is actively seeking foreign investment in the US to support job creation, capital formation and reshoring of manufacturing capability, this could be counter-productive."
Uncertainty in financial markets
Analysts at Morgan Stanley claim that Section 899 is likely to keep pressure on the dollar and "disincentivises foreign investment." Meanwhile, JPMorgan notes that it has "significant implications for both US and foreign corporations." A managing director at a large American bond fund admitted, "foreign clients are calling us panicked about this."
"It’s not totally clear whether Treasury holdings will be taxed, but our foreign investors are currently assuming they will be," the expert highlighted.
