NJSTONE9 wrote:Thank you Mick, you're very helpful.
I have one more question. My understanding of IDWP is that it is only the US part that attracts the withholding tax. That, and the fact it is domiciled in Ireland, reduces the amount to the 11-12% you calculated. The TER is a bit high though, at 0.59%.
If I bought say, REET from iShares.com, would I pay the dividends withholding tax on the full amount, ie 30%, because the fund is domiciled in the US? Or would it only be 30% for the US segment of the fund?
The TER for REET is just 0.14% so I'm wondering if it might overall be a better deal than IDWP. However, I have no idea how to calculate whether or not that is true.
VNQI is 0.24% and VNQ is 0.12% by way of comparison.
I'm not concerned about the inheritance fax as I won't be acquiring $60k in US domiciled stocks.
IDWP holds about 57% in US REITs/stocks, which would attract US taxation on dividends. The other 43% of the portfolio is stocks or REITs elsewhere in the world, but can also be taxed by those countries. May be at higher rates than the US, may also be lower.
One thing to consider is that REIT dividends are not necessarily taxed equally to dividends from stocks. REITs in the US can structure their dividends as capital gains instead of dividends (and can also recharacterize previous dividends as return of capital), which may be taxed differently. So you would have a bunch of reasons how the withholding tax differs from the US withholding tax on equity dividends; other countries, other type of dividends and of course the movement of constituents in the fund (which could for instance change the portion of US REITs and thus also the US taxes within the year).
If you are not a US person and your country does not have a withholding tax treaty with the US, you would indeed pay 30% withholding tax on distributions from US domiciled funds or stocks. So the global REIT ETF (REET) would pay withholding taxes on non-US holdings to the respective governments and when it distributes the dividends to you, those get taxed by 30%. So you would get hit by withholding taxes twice, and pretty hard too.
I can make an example comparison between the TERs and withholding taxes of REET and IDWP. Let us assume dividend yield is at 3% (REITs yield more than equities in general) for both funds. For IDWP we have an estimated withholding tax rate of 12%, times 3% yield is 0.03x0.12x100%=0.36% and add this to the TER of 0.59%, which is 0.95% for IDWP as our yearly estimated costs.
Page 44 of the annual report for REET
shows $342,050 in dividend income and $18,163 in foreign withholding taxes. 18163/342050x100%=5.31% in withholding taxes over the year ending in April 2015. Times the 3% dividend yield we assumed, we would get 0.16% in foreign withholding taxes per year. The fund then distributes the 3% yield minus 5.31% of that (which is already paid to foreign governments) to you, which is taxed at 30%, leading to (0.03x0.9469)x0.3x100%=0.85% in yearly US tax withholding. Add these two withholding taxes to the TER and you get yearly costs including taxes of 0.16+0.85+0.14=1.15%.
So IDWP comes ahead with costs of 0.95% over REET with 1.15%. The comparison is somewhat flawed as I use a pretty small sample (and differing time periods for the two), but I think you can reasonably assume that IDWP will win this battle most of the time. Has gotten a bit complex this post, but hope it made sense to you. Let me know if you have questions.