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Published: June 11, 2010
My friend Chris was irate. "My broker just
ripped me off!" he pouted. "Royal Dutch Shell (NYSE: RDS-A)
said in a press release they would pay $0.84 a share, but
instead my broker gave me $0.714 a share."
I tried to explain to Chris that it's not his broker's fault.
The broker doesn't withhold the amount. Royal Dutch Shell is a
foreign company. It's based in the Netherlands and is required
to withhold the tax Chris owes on the
dividend.
"But I pay taxes in the United States," Chris insisted. "The
U.S. government will get 15% of my dividend. It's not fair that
I pay some foreign government taxes, too."
I agreed with him it doesn't seem fair. But I asked him to look
at it in another way. The foreign government is just trying to
recoup millions of dollars in lost taxes it incurs when a
company pays dividends or interest to foreign taxpayers outside
their country.
The United States does the same thing. Just
about every country does. Greece withholds 30% to U.S.
taxpayers, the Philippines take off 25%, and South Korea shaves
16.5% off the top. Most other countries take 15% off the
dividends to U.S. taxpayers and, in turn, the U.S. takes 15% of
their country's dividends payments. Interest and royalty
payments are also taxed, but the rates tend to vary depending on
the country. (For a handy list of foreign withholding taxes,
check out the
Deloitte & Touche website.)
Foreign withholding taxes would be even greater if the U.S.
didn't have tax treaties to promote mutual investment with many
countries. For instance, the statutory withholding tax for the
Netherlands is 25%, but the tax treaty brings the statutory rate
down to 15%. That's why Chris got 85% of the declared dividend,
or $0.714 a share.
Generally, the higher yields you can get from foreign equities
can make up the difference. For example, Royal Dutch Shell's
nearly 7% yield is more than twice that of Texas-based Exxon
Mobil (NYSE: XOM), and the yields on Canadian royalty trusts
such as Pengrowth (NYSE: PGH) are even higher.
Also, you can claim credit or take a tax
deduction for the foreign tax withheld by filing
IRS Form 1116. But when the foreign security is an
American Depository Receipt (ADR) that's held in a
tax-deferred
IRA or 401(k) type of account, you generally can't recoup
the tax. However, since you're not dinged with the 15% U.S.
dividend tax in this account, the taxes you pay to a foreign
country are equivalent to what you pay Uncle Sam in a taxable
brokerage account, so it's a
wash.
Besides, there are exceptions.
Germany, for one, exempts IRAs from the
German withholding tax under a revised treaty with the
United States. Germany withholds 15% of the dividend
from your taxable account, but refunds the withholding
tax on German dividend-paying corporations held in an
IRA or other qualified U.S. pension fund.
Canada recently revised its tax treaty with the United
States as well. As of 2009, Canadian corporate dividends
and interest income are exempt from the 15% withholding
tax if they are held in an IRA or 401(k). That means you
should now be able to hold converted income trusts in an
IRA without being dinged the 15% withholding tax. |
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0% Withholding Tax |
| Argentina |
| Brazil |
| Hong Kong |
| Hungary |
| India |
| Ireland |
| Mexico |
| Singapore |
| South Africa |
| United
Kingdom |
| Venezuela |
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Action to Take -->
But the best news is there are about a dozen major equity
markets around the world where the withholding tax on qualifying
dividends is zilch. You pay no withholding tax and you get to
pocket every penny of the dividend. To the right is a list of
some of these foreign tax havens.
Some of these countries also offer compelling yields, making
them exceptionally attractive as a destination spot for income
investors. For instance, in
High-Yield International, I've loaded my model
portfolios with such high-yielding, high-performance equities as
Ireland's Babcock & Brown (NYSE: FLY), which yields over
7% and has returned more than +60%.
-- Carla Pasternak
Editor
High-Yield Investing
High-Yield International |
