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:
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 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.
|YPF||YPF SA (ADR)||Argentina|
|TEO||Telecom Argentina S.A. (ADR)||Argentina|
|NAT||Nordic American Tanker 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|
|TGP||Teekay LNG Partners L.P.||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|
|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|
|AAUKY.PK||Anglo American plc (ADR)||United Kingdom|
|PUK||Prudential Public Ltd Comp.||United Kingdom|
|TSCDY.PK||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|
This chart identifies the industry for the same list of stocks.
|YPF||Oil & Gas - Integrated|
|PRE||Insurance (Property & Casualty)|
|ALTE||Insurance (Property & Casualty)|
|ENH||Insurance (Property & Casualty)|
|AXS||Insurance (Property & Casualty)|
|AHL||Insurance (Property & Casualty)|
|AGO||Insurance (Property & Casualty)|
|SDRL||Oil Well Services & Equipment|
|TGH||Rental & Leasing|
|SID||Misc. Fabricated Products|
|GGB||Iron & Steel|
|UGP||Retail (Specialty Non-Apparel)|
|PBR||Oil & Gas - Integrated|
|FBR||Paper & Paper Products|
|BBD||Money Center Banks|
|CZZ||Oil & Gas Operations|
|HLF||Personal & Household Products|
|EC||Oil & Gas Operations|
|CEO||Oil & Gas Operations|
|ESV||Oil Well Services & Equipment|
|AZN||Biotechnology & Drugs|
|BP||Oil & Gas - Integrated|
|PSO||Printing & Publishing|
|IHG||Hotels & Motels|
|XRTX||Computer Storage Devices|
|RDS.B||Integrated Oil & Gas|
This table provides the web address of each of the companies listed above.
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.