What is the effect of dividend withholding on a portfolio

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Topic Author
bluebereft
Posts: 6
Joined: Fri Apr 30, 2021 9:56 am

What is the effect of dividend withholding on a portfolio

Post by bluebereft »

For context, from Singapore, in accumulation phase (mid 30s).

I used to buy VWRD on the LSE and a local equity etf and local bond etf. 80-20 equity to bonds and 30-70 local to global. The choice of VWRD was to avoid the 30% dividend withholding tax and possible future estate taxes from buying a US etf.

However, I found it rather burdensome to rebalance, especially since it involves currency conversions. I would also have to dollar cost average manually.

Recently there've been some robo-advisors that invest passively (ie with no 'tactical asset allocation'). I would be willing to pay that fee for the convenience for being able to DCA and not have to invest manually. But I want a better sense of the costs. However:
  • Robo A uses UCITS funds and DFA which have higher TER,
  • Robo B mainly uses Vanguard's US ETFs (vti vgk vpl vwo in the right proportions) which have a lower TER but 30% dividend withholding tax to me.
How do I estimate the effect of dividend withholding on the portfolio? Would it be correct to apply the withholding rate (30%) on the annual dividend yield to determine the net impact?

E.g. assuming A has fund expense ratio of 0.35% (for DFA world equity) and B has fund expense ratio of 0.1% (the vanguard ETFs), would this be a decent rough estimate of costs before the robo's fees?
A = 0.35%
B = 0.1% + 30% X 2% = 0.1% + 0.6% = 0.7%
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galeno
Posts: 2310
Joined: Fri Dec 21, 2007 12:06 pm

Re: What is the effect of dividend withholding on a portfolio

Post by galeno »

Use A.

For B you need to ADD the HIDDEN L1/L2 dividend WH taxes for the non-USA equities. 9.5% for non-US developed and 11.2% for EM.
KISS & STC.
Topic Author
bluebereft
Posts: 6
Joined: Fri Apr 30, 2021 9:56 am

Re: What is the effect of dividend withholding on a portfolio

Post by bluebereft »

galeno wrote: Tue May 18, 2021 7:57 am Use A.

For B you need to ADD the HIDDEN L1/L2 dividend WH taxes for the non-USA equities. 9.5% for non-US developed and 11.2% for EM.
Thank you!

Does L1/L2 refer to the withholding tax the fund incurs from companies domiliced elsewhere?

If so, wouldn't A similarly have such L1/L2 withholding?
TedSwippet
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Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: What is the effect of dividend withholding on a portfolio

Post by TedSwippet »

bluebereft wrote: Tue May 18, 2021 7:14 am How do I estimate the effect of dividend withholding on the portfolio? Would it be correct to apply the withholding rate (30%) on the annual dividend yield to determine the net impact?
Not quite. You lose 30% to the US on every dividend from a US domiciled ETF, through broker withholding, and on top of where the ETF itself may have paid perhaps around 10% non-US tax internally. For UCITS ETFs, you lose 15% on dividends from US stocks, and around 10% on dividends from non-US stocks, both paid internally by the ETF and with no subsequent broker withholding.

So, let's say your asset allocation is 60% US stocks, 40% non-US, and that US stocks pay a 2.0% dividend and non-US stocks pay 2.2%. For A, your tax drag is 60% * 30% * 2.0% + 40% * (10% + 30% * 90%) * 2.2% = 0.36% + 0.3256% = 0.6856%. For B, 60% * 15% * 2.0% + 40% * 10% * 2.2% = 0.18% + 0.088% = 0.268%. So for this set of assumptions, A has a 0.4176% higher tax drag. This more than destroys your suggested 0.35% - 0.1% = 0.25% TER advantage of the US domiciled funds.

In addition, for you, won't US estate tax risk be the main decision driver?

Edit to add: There is now an online TWR calculator in the wiki: https://www.bogleheads.org/wiki/Nonresi ... calculator
alex_686
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Re: What is the effect of dividend withholding on a portfolio

Post by alex_686 »

At a high level it does not matter. You have to pay the withholding tax. Either the fund pays it or you pay it. The question mainly comes down to timing.

I have worked this from the American mutual fund side, so I am sure that I am missing a fair amount of nuance here.

I would go with whatever fund provided is the largest mortgage terms of exposure. Sometimes we could claw back, avoid, or minimize taxes. However this was expensive and cost driven. We could claw back EU tax withholding if we spent 20k to hire a local tax specialist to submit paperwork. We did do with Germany but not Italy.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
TedSwippet
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Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: What is the effect of dividend withholding on a portfolio

Post by TedSwippet »

alex_686 wrote: Tue May 18, 2021 9:46 am At a high level it does not matter. You have to pay the withholding tax. Either the fund pays it or you pay it. The question mainly comes down to timing.
It does matter. Sometimes a lot. There can be a large differential in the US tax rate applied to the fund and the rate applied to the individual investor.
alex_686 wrote: Tue May 18, 2021 9:46 am I have worked this from the American mutual fund side, so I am sure that I am missing a fair amount of nuance here.
I think what you are missing is that US tax on dividends is 30%, via broker withholding on payment, for NRAs holding US domiciled ETFs. Compare to 0-15%, depending on the proportion of US stocks held, for an Ireland domiciled ETF, paid internally by the ETF but with no broker withholding on payment.

This usually makes US domiciled ETFs a worse choice for NRAs than non-US domiciled ones (even before considering the threat of US estate tax for holdings above just $60k). The OP lives in a country without any US tax treaties.

Lots more in these wiki articles:
- Nonresident alien taxation - Bogleheads
- Nonresident alien investors and Ireland domiciled ETFs - Bogleheads
Topic Author
bluebereft
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Joined: Fri Apr 30, 2021 9:56 am

Re: What is the effect of dividend withholding on a portfolio

Post by bluebereft »

TedSwippet wrote: Tue May 18, 2021 9:28 am Not quite. You lose 30% to the US on every dividend from a US domiciled ETF, through broker withholding, and on top of where the ETF itself may have paid perhaps around 10% non-US tax internally. For UCITS ETFs, you lose 15% on dividends from US stocks, and around 10% on dividends from non-US stocks, both paid internally by the ETF and with no subsequent broker withholding.

So, let's say your asset allocation is 60% US stocks, 40% non-US, and that US stocks pay a 2.0% dividend and non-US stocks pay 2.2%. For A, your tax drag is 60% * 30% * 2.0% + 40% * (10% + 30% * 90%) * 2.2% = 0.36% + 0.3256% = 0.6856%. For B, 60% * 15% * 2.0% + 40% * 10% * 2.2% = 0.18% + 0.088% = 0.268%. So for this set of assumptions, A has a 0.4176% higher tax drag. This more than destroys your suggested 0.35% - 0.1% = 0.25% TER advantage of the US domiciled funds.

Edit to add: There is now an online TWR calculator in the wiki: https://www.bogleheads.org/wiki/Nonresi ... calculator
Thanks, this is exactly what I needed!
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galeno
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Re: What is the effect of dividend withholding on a portfolio

Post by galeno »

A lot of US investors comment here. Almost all are clueless to the nonsense we non-US investors have to go through to invest like Bogleheads.

In general. US investors should use USA domicled funds / ETFs.

Non-US investors should avoid USA domiciled funds / ETFs.

Best for non-US investors is UCITS ETFs domiciled in Ireland.
KISS & STC.
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