where to get tax advice

[Tkydon]

Re: where to get tax advice

Unread post by rasselbiluga » Sat Jun 19, 2021 12:57 pm
Thanks again for the answers guys! Incredible details Tkydon
I have another naive question. I still don't really understand why the US-Japan tax treaty is relevant for Ireland-domiciled ETFs. In my mind, I had the following picture:

Assume the ETF holds US stocks. A US company pays dividends to the ETF. 15% tax is withhold, according to the Ireland-Japan tax treaty.
The ETF pays out the dividends to the ETF holders (or reinvests in the case of accumulating ETFs). No tax is withhold because the ETF is domiciled in Ireland.
Since no tax was withhold in Ireland, as a Japan resident I pay the full 20% tax on the dividends to the Japanese government.

So the US already withhold 15% tax. Still I can invoke the Japan-US treaty? Isn't holding an Ireland-domiciled ETF kind of the same thing as holding stocks from an Irish company?
Also, if the ETF is globally diversified, does that mean that one can (in theory) invoke tax treaties with all the countries from which the ETF holds stocks?

In any case, the point of choosing accumulating ETFs was to avoid filing a Japanese tax return altogether. So either I can verify that indeed no Japanese tax is due on those, or I might consider investing in Japan only (with the risk that I have to sell everything if I leave Japan). The third option would be to choose distributing ETFs, which would mean I need to file a tax return.
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The idea of Tax Treaties is to reduce double taxation between the ratifying parties to the treaty.

It depends whether you actually get a Statement of Taxes Withheld sent to you (A US Form 1042-S)

No, the US withholds US tax payable to the US on the Dividends. This is unavoidable. All US Dividends are subject to US Dividend Tax, regardless of the nationality, location or Domicile of the recipient.

If no Tax treaty is invoked, the US will withhold 30% US Dividend Tax.
If the ETF invokes the US-Ireland Tax Treaty, that would reduce the US Withholding of US Dividend Tax to 15%, so the ETF would receive 85% of the Dividend.
If you could instead invoke the US-Japan Tax Treaty, that would reduce the US Withholding of US Dividend Tax to 10%

Whatever the Tax Rate, if you have documentary evidence, you can use that as a Foreign Tax Credit - Page 1- Item 46 on the Form B.

You have to declare the Dividend Gross (before and Withholding Tax) under the Separate Self Assessment Taxation - Form-B Pages 1&2 & Page 3
Page 3 and the values go into Page 1 - Item 5

They will then assess the tax due - 15% National - 0.315 Reconstruction - and later 5% Residential Taxes - Total 20.31%

Then, when you receive the Notification of Foreign Taxes Withheld, you can go back and amend your Filing by adding that document and entering the Value of Foreign Taxes Withheld into Page 1 - Item 46.

If the Withholding was 10% or 15% you will get that Credited back to you leaving the remaining National Tax to be paid to e either 5% or 0% respectively. You will still be liable for the 0.315 Reconstruction - and later 5% Residential Taxes.

HTH.

[rhe]

In any case, the point of choosing accumulating ETFs was to avoid filing a Japanese tax return altogether.

The success of this strategy might depend on how much you are planning on saving going forward. There is a JPY 50m threshold for reporting foreign accounts. If you end up above this threshold, you will be in a situation where you end up reporting a large foreign brokerage account, but you have never reported any income from it. It seems like this is a situation that is might lead to the tax people asking some questions.

As I mentioned before, I don't have any experience with the NTA, but based on my experience with multiple other countries there is no one answer to the question "how much tax do I owe?", and the last thing you want is auditors who are already suspicious poking around your paperwork to see if you owe more money.

At least in my case, I feel like it is a better long term bet to hold my US stocks in US-domiciled distributing ETFs, declare these dividends each year, and claim the 10% IRS withholding on my Japanese taxes. It took a full day to figure out how to do this for the first time, but further years shouldn't require more than a couple hours of time per year.

(whether you are better off investing via a Japanese brokerage rather than an international one is an interesting question, and if you look at my post history there is another thread where this was discussed fairly extensively.)

[rasselbiluga]

The success of this strategy might depend on how much you are planning on saving going forward. There is a JPY 50m threshold for reporting foreign accounts. If you end up above this threshold, you will be in a situation where you end up reporting a large foreign brokerage account, but you have never reported any income from it. It seems like this is a situation that is might lead to the tax people asking some questions.

I planned to just put my current savings (~100k USD) into the foreign brokerage account and let it sit there, but to invest any new savings with a Japanese broker. So I am not going to go over the 50m JPY foreign account threshold. But I think your point still stands; for example, if I eventually sell something with a capital gain, I will need to report the account.

As I mentioned before, I don't have any experience with the NTA, but based on my experience with multiple other countries there is no one answer to the question "how much tax do I owe?",

That's the frustrating part...
I found it interesting thought that Blackrock Japan has an Ireland-domiciled, accumulating ETF in their product list: https://www.blackrock.com/jp/individual ... -ucits-etf. This ETF seems not available with Rakuten though. However, I found an accumulating, Singapore-domiciled ETF that can be bought with Rakuten: https://www.rakuten-sec.co.jp/web/marke ... ic=INDI.SI. It's not explicitly marked as "accumulating", but the prospectus clearly states (under "Distribution Policy") that "The Manager currently does not intend to make any distributions of the income of the MSCI India ETF to Unitholders." This is similar to the Ireland-domiciled ETF's policy that states "The Directors do not intend to declare dividends on Accumulating Shares." Anyway, maybe these accumulating ETFs are not that exotic in Japan as I previously thought. I wonder what would happen if you put that Singapore-domiciled ETF into a specific account (特定口座・源泉あり) that is supposed to "do the taxes" for you...

[rasselbiluga]

And here is an France-domiciled accumulating ETF traded at the Singapore exchange that can be bought with Rakuten: https://www.rakuten-sec.co.jp/web/marke ... ic=LLEM.SI. This one is explicitly marked as accumulating (see e.g. https://www.lyxoretf.com.sg/en/retail/p ... 435297/usd).