Rakuten VTI Fund or Vanguard Total Market ETF in Monex NISA account?

[adamu]

I think the point ChapInToyko is making, and that's explained in the article, is that if you buy a dividend-paying ETF in a taxable account, you can claim the foreign tax deduction, but if you buy a reinvesting fund, you can't.

For taxable, it seems there are now three categories:

1) Foreign ETFs that pay a dividend - you can claim the foreign tax deduction
2) Funds that invest in foreign stocks, and pay out the dividend: foreign tax deduction is applied automatically.
3) Funds that invest in foreign stocks but don't pay out a dividend: double taxed (foreign tax on the internal dividend, Japanese CGT at the point of sale)

The article points out that for point 3, although it's double taxed, the fact that the Japanese tax is delayed as long as possible as capital gains still makes it the best choice for long term investing. But for shorter term, it loses out due to the extra tax.

In a NISA, there is no double taxation because there's no Japanese tax, so all the options will just pay the foreign tax, so you may as well choose option 3) to maximize the use of compounding in the NISA.

[ChapInTokyo]

Yes, that’s exactly what I understood from the Shintaro article. In his simulation the funds which distribute now have the advantage in the shorter term but over the long term the tax deferment of the non distributing funds win out.

Interestingly a senior researcher in the financial research department at Daiwa Institute of Research did a simulation too and concluded that the distribution paying funds have a higher probability of attaining better returns.

(Translated by DeepL)
From next year, distribution payments could be tax-advantaged
RSS
30 Jul 2019
Senior Researcher, Financial Research Department
Shungo Koreeda
Traditionally, when making long-term investments through investment trusts (*1), it has been 'industry wisdom' that the payment of distributions is disadvantageous to investors as it accelerates the timing of taxation, and that it is advantageous for investors to retain as much profit in the fund as possible and not pay out distributions.

However, the new 'foreign tax credit' system to be introduced from January 2020 is likely to make this common sense no longer apply in some cases.

The 'foreign tax credit' is a mechanism that allows a taxpayer to deduct the amount of tax paid in a foreign country from the amount of income tax, etc. payable by that taxpayer in Japan. Individual investors who invest directly in foreign stocks and bonds are entitled to a foreign tax credit through a tax return. Foreign tax on dividends and distributions from investments in foreign stocks and foreign REITs (*2) made indirectly through domestic investment trusts is not currently eligible for foreign tax credits, but will become eligible under the new system.

Under the new system, foreign tax on foreign investments made through mutual funds will be deducted from the amount of income tax due when the mutual fund pays distributions to investors (i.e. less tax will be withheld on distributions than at present). The foreign tax credit is adjusted at the time of distribution, meaning that the foreign tax credit is not adjusted unless distributions are paid. In other words, an investment trust that retains profits in a fund and does not pay out distributions is not entitled to a foreign tax credit.

Under the new system, while mutual funds have the disadvantage of paying distributions earlier in the taxation period, they also have the advantage of receiving a foreign tax credit if they invest in foreign shares or foreign REITs, etc. This means that even investors who wish to make long-term investments will not necessarily be disadvantaged by the payment of distributions. The author's calculations of the after-tax performance of funds that do not pay out distributions and funds that do, under certain assumptions, show that funds that pay out distributions are likely to be more advantageous for tax purposes (*3).

From next year, it will not necessarily be more advantageous for investors not to pay out distributions, at least for mutual funds investing in foreign stocks and foreign REITs. https://www.dir.co.jp/report/column/201 ... 10290.html

[ChapInTokyo]

Here’s a link to the actual report at Daiwa Institute of Research:

https://www.dir.co.jp/report/research/l ... 20839.html

According to the research,

The estimates show that for funds B3, B4 and B5, where the level of foreign tax borne by the fund is more than 0.3% per annum (the tax rate in the foreign country is approximately 9.1%8), the after-tax return is higher than fund A, which does not pay out distributions, to the extent that the fund's holding period is 40 years or less. For fund B1, where the level of foreign tax borne by the fund is 0.1% per annum (the tax rate in the foreign country is approximately 3.2%), the after-tax return is also higher than that of fund A, which does not pay out distributions, for holding periods of 12 years or less, where the level of foreign tax is 0.2% per annum (the tax rate in the foreign country is approximately 6.3%) For fund B2, the after-tax return is also higher than that of fund A for holding periods of 27 years or less.

Explanation of the system of foreign tax credits for investment trusts and estimation of the impact on funds
Possible difference in after-tax returns of around 0.1% to 0.9% ppt per annum.
RSS
12 Jun 2019
Taxation system
Senior Researcher, Financial Research Department
Shungo Koreeda
Download PDF
SUMMARY.
The 2018 Tax Reform amended the tax system to make investments in foreign assets through publicly offered investment trusts eligible for foreign tax credits from dividends paid on or after 1 January 2020, and the 2019 Tax Reform developed specific rules for calculating the amount of the credit. This report provides an explanation of the system of foreign tax credits for investment trusts for individual investors and examines the impact on funds based on trial calculations.

◆Publicly offered investment trusts that invest solely in foreign stocks and foreign REITs are generally considered to bear foreign tax at an annual rate of around 0.1% to 0.9%. However, not all of the foreign tax burden borne by publicly offered investment trusts can be deducted. The estimates in this report show that the proportion of foreign taxes borne by publicly offered investment trusts that could be deductible varies significantly depending on the fund's performance, with the percentage sometimes being as high as 100 per cent and sometimes less than 20 per cent.

◆There is therefore a possible difference of around 0.1%-0.9% ppt per annum in after-tax performance depending on the institutional factors of the foreign tax credit, even if the pre-tax performance of the publicly offered investment trusts is exactly the same. This difference is likely to be particularly significant for index funds investing in foreign equities and foreign REITs, where the difference cannot be ignored.

◆Traditionally, distribution payments were considered to be disadvantageous to investors when investing for the long term, as they accelerate the timing of taxation. However, the estimates in this report show that, following the introduction of the foreign tax credit, if the foreign taxes borne by the fund can be fully deducted from income tax on distributions, it is more likely that investors will receive a higher after-tax return if distributions are paid out than if they are not paid out.