Foreign taxes on dividends

Legacy_user

Hi everyone
I was wondering if the "withholding tax" I've read about is really a big drag?
I figured it might be why my global fund priced in gbp has a low yield?
Is it a reason to go more UK? Even ditch the global? (Aside from non tax reasons to be global)
Or a reason to go growth?

(Basic rate taxpayer using a sipp)

I suppose it does matter as when stocks go ex dividend I won't get the full dividend

Fund is a vanguard one and mostly US stocks so I'm not sure if they get favouritism for that

System

Does it mean that data from US companies like morningstar aren't accurate for the UK investor?

coyrls

Global funds held in the UK are not subject to withholding tax. If you hold investments abroad and the appropriate tax treaties are in place (e.g. in the US), dividends from your investments held in that country would be subject to withholding tax. When you declare your dividends on investments held abroad, any tax due on those dividends has the withholding tax subtracted from the tax due.

System

Thank you coyrls, are global funds based in the UK able to claim a tax credit? Or companies issuing dividends dont withhold to them? How are funds able to get better treatment than an individual?

steampowered

There are many possible reasons why your fund might have a low yield. Perhaps it is a fund which aims for capital growth rather than income. You need to give us more details or tell us what fund you are referring to.

coyrls

MatthewAinsworth wrote: »

Thank you coyrls, are global funds based in the UK able to claim a tax credit? Or companies issuing dividends dont withhold to them? How are funds able to get better treatment than an individual?

It is where the fund is domicled that matters. Funds domicled in the UK, Ireland and Luxembourg will not levy witholding tax on dividends paid to UK investors (http://monevator.com/withholding-tax-on-dividends/).

bowlhead99

MatthewAinsworth wrote: »

Hi everyone
I was wondering if the "withholding tax" I've read about is really a big drag?
I figured it might be why my global fund priced in gbp has a low yield?

steampowered wrote: »

There are many possible reasons why your fund might have a low yield. Perhaps it is a fund which aims for capital growth rather than income. You need to give us more details or tell us what fund you are referring to.

The most common reason why your global fund has a low yield is not that there are loads of taxes, it's that the average dividend paid by the companies in other parts of the world is simply lower than what you see in, say, the FTSE100.

Our UK FTSE is not a very diversified index and the top end of it representing most of the capital is in big solid dividend payers which are 'cash cows' like oil and pharmaceutical companies and tobacco companies. Overall the FTSE 100 historic dividend yield at end of October was 3.7% and the FTSE350 (which is mostly the FTSE100) was 3.5%.

By contrast over in the US you have companies like Apple (which currently pays 2% but from '96 to 2012 didn't pay anything), Amazon (which doesn't pay anything), Alphabet/Google (which doesn't pay anything) and lots of other companies that might prefer to return cash to investors via share buy-backs rather than dividends, for tax efficiency.

So both due to a different mix of company types, and the 'less of a dividend culture', which is seen in other parts of the world, the raw yield is, simply, lower. The FTSE All-World All-Cap (representing $40 trillion of share capital) has a yield of 2.5%, while the All-World Small-Cap (representing $4tn or so, majority US) is only 2%. That's a lot lower than the FTSE 100 or 350 at over 3.5% and it is not because tax has been withheld, it's because the companies just haven't paid as much in the way of dividends.

So, I wouldn't go worrying too much about withholding tax as a drag. For example, say the withholding tax on your smallcap US companies which pay less than 2% dividends anyway, is 15%. That's 0.3% cost, on that particular part of your holdings from that particular country. Other countries don't even have any irrecoverable withholding tax. The excess return from going US-index rather than UK-index for the last few decades is comfortably in excess of the 0.3% anyway. You would not want to avoid investing in half the investible market cap of the planet just to try and dodge the tax. Investing in UK stocks has other transaction taxes anyway, e.g. stamp duty at 0.5% on everything the fund buys for you.

UK OEICs don't pay UK tax on their domestic or foreign dividend income but they will typically suffer some irrecoverable withholding tax on their overseas holdings, just like you would if you held the overseas companies direct. But their custodians/ asset managers will at least ensure they fill out all the forms to reclaim as much overseas tax as they possibly can and minimise the irrecoverable tax cost. A difference for you building a DIY portfolio of direct holdings is that if you held the overseas companies direct, you would start off thinking it's relatively easy to fill out the forms to qualify for the treaty withholding rate in some countries (like getting US dividends at the best 15% rate instead of the standard 30% withholding) but it is a complete pain in the bumb to do that for every single jurisdiction on the planet (US, france, germany, etc etc etc etc) and you would get bored and give up.

And the solution of not investing at all in the countries where you might suffer some kind of withholding tax at source is not worth thinking about because it produces a very imbalanced portfolio in terms of risks.

coyrls wrote: »

Global funds held in the UK are not subject to withholding tax.

Matthew, to clarify coryls's point, the UK-based globally-investing fund that distributes dividends to you does not have to withhold tax from you on the profits that it sends you, because it is allowed to trust that you will pay whatever UK tax you owe on your dividend income (that UK tax being nil anyway if you're holding the fund via an ISA or SIPP). But in order to make its profits in the first place, it may have suffered some irrecoverable foreign withholding tax on some parts of its foreign income.

System

Thank you everyone, I suppose low yield is more tax efficient and maybe the UK culture is different because of isas, sipps, etc. I think its definitely a price worth paying for the diversification