Stocks That Avoid Unrecoverable Foreign Dividend Withholding In Tax Deferred Accounts

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 |  Includes: AZN, BP, GSK, PBR, SDRL, VOD
by: Richard Shaw

U.S. investors can achieve some economic recapture of foreign tax withholding on their foreign dividend stocks through their U.S. tax returns.

However, if foreign dividend taxes are withheld for investments held in IRA's, 401-k's or other tax deferred or tax-exempt accounts, there is no equivalent method for economic recapture of some or all of foreign dividend tax withholding.

Consequently, investors should be aware of which dividend stocks pose the tax withholding problem and which do not. That is primarily, but not entirely a function of the country of domicile of the dividend stock.

This is not to say that investors should avoid attractive stocks merely because of withholding of dividend taxes. Dividends are only part of the total return story. But, if an investor is dividend seeking, then it is a reasonable idea to try to find yield that is undiminished by withholding. To do otherwise, might be to assume extra levels of risk in order to achieve the same net yield as available from a stock that is not subject to dividend tax withholding.

For example, a company subject to 30% withholding, as in France, would need a gross (pre-withholding) yield almost 43% higher to create the same net yield as another stock not subject to withholding. A French company, therefore, all other things being equal, would need a 5.7% gross yield to equal a 4% gross yield from a U.K. company that would not be subject to dividend withholding tax. That yield differential may put the two stocks in different risk levels.

N.B. We are not tax experts. We are investors seeking to minimize taxes. Do not rely exclusively on this article. Do your own research or consult your tax advisor for final verification of any tax matter.

Withholding Rates By Country:

This table, based on a Dow Jones information release, lists countries by the level of dividend withholding tax they impose:

Click to enlarge

Franking:

The reason we said that the level of withholding is primarily but not entirely a function of the country of domicile, is that some countries may allow for "franking" (Australia does).

Franking, is the partial or full payment of the withholding taxes by the company, with the result that investors experience no withholding or less withholding.

Here, for example, is what the Australian tax authorities say about "franking":

"Non-resident withholding is where payers are required to withhold an amount from interest, unfranked dividend and royalty payments to non-residents. …

Withholding rates are:

• generally 10% for interest

• generally 30% for dividends, unless an international agreement applies - however, the tax treatment of a dividend will depend on a number of circumstances and whether it has been franked.

If a dividend is from a public company and has been fully franked, income tax has already been taken out before being paid to a shareholder. No further amount needs to be withheld. If a dividend is partially or completely unfranked, an amount must be withheld from the unfranked amount."

While we cannot be entirely certain, it appears that BHP (the Australian ADR for BHP Billiton plc) is partially franked. However, since the other BHP Billiton plc ADR (BBL) is U.K. based, paying a higher net yield (not subject to dividend tax withholding), we would tend to chose BBL over BHP in the mining space.

BBL has a 3.8% yield, while BHP has a 3.30% net yield after withholding, according to Morningstar -- the result of withholding and perhaps some franking.

Dual Listing Companies:

That dual listing approach can also be useful in cases not involving franking. For example, Royal Dutch has dual listings, with one share class in The Netherlands (subject to 15% withholding) and the other in the U.K. (not subject to withholding). The result is a higher net yield for the U.K. shares. That may be relatively unimportant to investors in regular taxable accounts, but for tax deferred or tax exempt accounts, the withholding is lost when owning the Netherlands domiciled shares.

RDS.B is the U.K. share class, and RDS.A is the Netherlands share class of Royal Dutch.

RDS.B has a 4.88% projected yield according to Morningstar, whereas RDS.A has a projected yield of 4.31%. The former does not have withholding, but the latter does.

There are not many of these dual listed situations, so the issue will usually be to determine if the withholding costs of a stock domiciled in a country requiring withholding is overshadowed by the capital appreciation of the stock. If not, then selecting a stock from a non-withholding country may make more sense -- particularly for dividend oriented investors.

Broker Choices for IRA Accounts:

Some countries, such as Australia, withhold lower rates for tax-deferred accounts than regular taxable accounts. Australia, for example, appears to withhold 30% on regular accounts and only 15% on verified retirement accounts.

There is the rub -- how to verify that an account is a valid tax-deferred retirement account.

If your broker takes care of that then all is well. If the task is up to you, then you may as well forget about it unless you have invested very large sums.

Presumably, brokers like Schwab and Fidelity have been pre-certified by Australia to represent that an account is a valid tax-deferred account. They get the job done efficiently and invisibly.

If, per chance, you use a broker who does not do that (we have heard there are some, but don't have direct knowledge of that) then you would be highly challenged in terms of a learning curve, time and expense to get the job done yourself -- making the more favorable rate virtually unattainable.

Just to be safe, if you use a small Brand X broker, ask to make sure they take care of that for you.

List of Dividend Stocks Without Withholding:

Should this issue be of interest or concern to you, we have compiled a list of all non-U.S. stocks available in the U.S. that are from zero withholding tax domiciles, and that also have a 3-month average daily dollar trading volume of at least $10,000, and that as of 06/29/2012 had a yield of at least 2%.

None of these names are either recommendations to buy or sell. They are solely and merely a listing of those stocks that meet the criteria itemized above, for those seeking to avoid foreign dividend withholding taxes in tax deferred or tax exempt accounts.

Ticker Company name Country
YPF YPF SA (ADR) Argentina
TEO Telecom Argentina S.A. (ADR) Argentina
TK Teekay Corporation Bermuda
PRE PartnerRe Ltd Bermuda
NAT Nordic American Tanker Ltd Bermuda
FRO Frontline Ltd. Bermuda
MRVL Marvell Technology Group Ltd. Bermuda
ALTE Alterra Capital Holdings Ltd Bermuda
ENH Endurance Specialty Holdings Bermuda
AXS Axis Capital Holdings Limited Bermuda
GLNG Golar LNG Limited Bermuda
AHL Aspen Insurance Holdings Ltd Bermuda
AGO Assured Guaranty Ltd. Bermuda
SFL Ship Finance International Lim Bermuda
LAZ Lazard Ltd Bermuda
TGP Teekay LNG Partners L.P. Bermuda
SDRL Seadrill Ltd Bermuda
TOO Teekay Offshore Partners L.P. Bermuda
VR ValidU.S. Holdings, Ltd. Bermuda
BIP Brookfield Infrastructure Part Bermuda
TGH Textainer Group Holdings Ltd Bermuda
TNK Teekay Tankers Ltd. Bermuda
ELP Comp. Paranaense de Energi Brazil
SID Comp. Siderurgica Nacional Brazil
BAK Braskem SA (ADR) Brazil
ABV Companhia de Bebidas das Brazil
VIV Telefonica Brasil SA (ADR) Brazil
GGB Gerdau SA (ADR) Brazil
UGP Ultrapar Participacoes SA (ADR Brazil
PBR Petroleo Brasileiro SA (ADR) Brazil
CIG Companhia Energetica Minas Brazil
FBR Fibria Celulose S.A. (ADR) Brazil
BRFS BRF Brasil Foods SA (ADR) Brazil
OIBR Oi SA (ADR) Brazil
VALE Vale SA (ADR) Brazil
SBS Comp. de Saneamento Basico Brazil
ITUB Itau Unibanco Holding (ADR) Brazil
BBD Banco Bradesco SA (ADR) Brazil
GOL Gol Linhas Aereas Inteligentes Brazil
CPL CPFL Energia S.A. (ADR) Brazil
TAM TAM S.A. (ADR) Brazil
CZZ Cosan Limited(ADR) Brazil
BSBR Banco Santander (Brasil) (AD Brazil
HLF Herbalife Ltd. Cayman Islands
CIB Bancolombia S.A. (ADR) Colombia
EC Ecopetrol S.A. (ADR) Colombia
CHL China Mobile Ltd. (ADR) Hong Kong
CEO CNOOC Limited (ADR) Hong Kong
FMCN Focus Media Holding Ltd (ADR Hong Kong
ASR Grupo Aeroportuario del Sures Mexico
CPA Copa Holdings, S.A. Panama
BT BT Group plc (ADR) United Kingdom
ESV ENSCO PLC United Kingdom
GSK GlaxoSmithKline plc (ADR) United Kingdom
RIO Rio Tinto plc (ADR) United Kingdom
BCS Barclays PLC (ADR) United Kingdom
VOD Vodafone Group Plc (ADR) United Kingdom
UL Unilever plc (ADR) United Kingdom
BTI British American Tobacco PLC United Kingdom
AZN AstraZeneca plc (ADR) United Kingdom
DEO Diageo plc (ADR) United Kingdom
HBC HSBC Holdings plc (ADR) United Kingdom
BP BP plc (ADR) United Kingdom
NGG National Grid plc (ADR) United Kingdom
OTCPK:AAUKY Anglo American plc (ADR) United Kingdom
PUK Prudential Public Ltd Comp. United Kingdom
OTCPK:TSCDY Tesco PLC (ADR) United Kingdom
PSO Pearson PLC (ADR) United Kingdom
CUK Carnival plc (ADR) United Kingdom
WSH Willis Group Holdings PLC United Kingdom
IHG InterContinental Hotels Group United Kingdom
BBL BHP Billiton plc (ADR) United Kingdom
XRTX Xyratex Ltd. United Kingdom
RDS.B Royal Dutch Shell plc (ADR) United Kingdom
Click to enlarge

This chart identifies the industry for the same list of stocks.

Ticker Industry
YPF Oil & Gas - Integrated
TEO Communications Services
TK Water Transportation
PRE Insurance (Property & Casualty)
NAT Water Transportation
FRO Water Transportation
MRVL Semiconductors
ALTE Insurance (Property & Casualty)
ENH Insurance (Property & Casualty)
AXS Insurance (Property & Casualty)
GLNG Water Transportation
AHL Insurance (Property & Casualty)
AGO Insurance (Property & Casualty)
SFL Water Transportation
LAZ Investment Services
TGP Water Transportation
SDRL Oil Well Services & Equipment
TOO Water Transportation
VR Life Insurance
BIP Electric Utilities
TGH Rental & Leasing
TNK Water Transportation
ELP Electric Utilities
SID Misc. Fabricated Products
BAK Chemical Manufacturing
ABV Beverages (Alcoholic)
VIV Communications Services
GGB Iron & Steel
UGP Retail (Specialty Non-Apparel)
PBR Oil & Gas - Integrated
CIG Electric Utilities
FBR Paper & Paper Products
BRFS Food Processing
OIBR Communications Services
VALE Metal Mining
SBS Water Utilities
ITUB Regional Banks
BBD Money Center Banks
GOL Airline
CPL Electric Utilities
TAM Airline
CZZ Oil & Gas Operations
BSBR Regional Banks
HLF Personal & Household Products
CIB Regional Banks
EC Oil & Gas Operations
CHL Communications Services
CEO Oil & Gas Operations
FMCN Advertising
ASR Misc. Transportation
CPA Airline
BT Communications Services
ESV Oil Well Services & Equipment
GSK Major Drugs
RIO Metal Mining
BCS Regional Banks
VOD Communications Services
UL Food Processing
BTI Tobacco
AZN Biotechnology & Drugs
DEO Beverages (Alcoholic)
HBC Regional Banks
BP Oil & Gas - Integrated
NGG Electric Utilities
AAUKY.PK Metal Mining
PUK Insurance
TSCDY.PK Retail (Grocery)
PSO Printing & Publishing
CUK Recreational Activities
WSH Insurance (Miscellaneous)
IHG Hotels & Motels
BBL Metal Mining
XRTX Computer Storage Devices
RDS.B Integrated Oil & Gas
Click to enlarge

This table provides the web address of each of the companies listed above.

Ticker Web address
YPF www.ypf.com/
TEO www.telecom.com.ar/
TK www.teekay.com/
PRE www.partnerre.com/
NAT www.nat.bm
FRO www.frontline.bm/
MRVL www.marvell.com
ALTE www.alterracap.com/
ENH www.endurance.bm/
AXS www.axiscapital.com/
GLNG www.golarlng.com/
AHL www.aspen.co/
AGO www.assuredguaranty.com
SFL www.shipfinance.bm
LAZ www.lazard.com/
TGP www.teekaylng.com
SDRL www.seadrill.com/
TOO www.teekayoffshore.com
VR www.validusholdings.com
BIP www.brookfieldinfrastructure.com
TGH www.textainer.com
TNK www.teekaytankers.com/
ELP www.copel.com/
SID www.csn.com.br/
BAK www.braskem.com.br/
ABV www.ambev.com.br/pt-br
VIV www.telefonica.com/
GGB www.gerdau.com
UGP www.ultra.com.br/
PBR www.petrobras.com.br/
CIG www.cemig.com.br/
FBR www.fibria.com
BRFS www.brasilfoods.com/
OIBR www.oi.com.br
VALE www.vale.com
SBS www.sabesp.com.br
ITUB www.itau.com.br/
BBD www.bradesco.com.br/
GOL www.voegol.com.br/
CPL www.cpfl.com.br/
TAM www.tam.com.br
CZZ www.cosanlimited.com
BSBR www.santander.com.br/
HLF www.herbalife.com
CIB www.grupobancolombia.com/
EC www.ecopetrol.com.co/
CHL www.chinamobileltd.com
CEO www.cnoocltd.com/
FMCN www.focusmedia.cn
ASR www.asur.com.mx/
CPA www.copaair.com/
BT www.bt.com/
ESV www.enscoplc.com/
GSK www.gsk.com/
RIO www.riotinto.com/
BCS group.barclays.com/
VOD www.vodafone.com/
UL www.unilever.com/
BTI www.bat.com/
AZN www.astrazeneca.com/
DEO www.diageo.com/
HBC www.hsbc.com/
BP www.bp.com
NGG www.nationalgrid.com
AAUKY.PK www.angloamerican.com/
PUK www.prudential.co.uk
TSCDY.PK www.tescoplc.com/
PSO www.pearson.com/
CUK www.carnivalplc.com
WSH www.willis.com
IHG www.ihgplc.com/
BBL www.bhpbilliton.com/
XRTX www.xyratex.com/
RDS.B www.shell.com/
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Disclosure: QVM has positions in GSK, BTI, VOD, BBL and RDS.B as of the creation date of this article (July 7, 2012).

General Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.