Author Topic: Domicile of funds and tax leakage.  (Read 2981 times)

alwaysonit

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Domicile of funds and tax leakage.
« on: September 24, 2014, 03:14:37 PM »
I think this simple example should answer and doubts investors have on tax leakage. If you can answer any of the below it would be a great help.

An ETF holds only American companies and is domiciled in Ireland. There are 2 countries that can invest in the ETF:

Country A has a tax treaty with USA which will reduce the Dividend Withholding Tax to 15% and has a tax treaty with Ireland which means they are exempt from Irish DWT.

Country B has no tax treaty with either country so is subject to DWT of 30% from American companies and 15% from Ireland.

Does Ireland take any DWT from an owner from country B simply because they own an ETF that is domiciled in Ireland?

And do the American companies pay all ETF holders dividends with only 15% DWT because the ETF is domiciled in Ireland, and so they apply the Irish-USA tax treaty to all holders?

Or do they deal with each ETF holder separately, taking 15% DWT from holders from country A but 30% from holders from country B?


zb3

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Re: Domicile of funds and tax leakage.
« Reply #1 on: September 24, 2014, 04:42:28 PM »
You essentially get taxed twice on dividends from overseas companies as you don't get the benefit of the company's imputation/franking credits.  This is a tax credit that represents the tax paid by the company, not sure what its called in the US, but its called imputation credits in NZ, and franking credits in Aus.

Ie a company makes 100 dollars, pays tax on that of 28 dollars.  A dividend is paid out of 72 dollars, with 28 dollars imputation credits attached (taking the total back up to 100), the investor then pays tax on the 100 at their marginal tax rate, i.e. say 30%, but then can deduct the imputation credits, so effectively only pays 2 dollars in tax.  This is to prevent company profits being taxed twice (i.e. once by company and then again when the profits are paid out as a dividend).

If you are a non resident investor you do not get the benefit of these credits which represent the tax paid by the company.  So you receive the dividend of only 70 dollars with no credits attached, and then get taxed on that.  In NZ we have a double tax agreement with the US, so the US will withhold 15% tax from the 70 dollars, and then when the dividend arrives in NZ, it gets taxed again.

Also in your example, it is not just people from those two countries that can invest.  NZers can invest in US ETFS despite the fact that the companies are American and the fund is domiciled there, its just the tax implications make it particularly unfavourable.


This is my understanding of how it works anyway.  I could be wrong.

Meat Popsicle

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Re: Domicile of funds and tax leakage.
« Reply #2 on: September 24, 2014, 09:37:10 PM »
I suspect it depends on the country, their tax agreements and tax structure, however the withheld tax (say the 15% from US) gets counted as foreign tax paid and that could be deducted from your tax bill (counted as tax already paid).
At least that was my experience with tax from a US domiciled ETF and this years tax return here in Oz ...although I may have mis-understood the numbers.