StockBeard wrote: ↑Wed Jun 05, 2019 7:10 am
So, after going through a world-renowned company to handle my JP and US taxes this year, I have reached the conclusion that it doesn't seem to be possible to avoid being double taxed on US-based dividends.
A few specificities of my situation:
1) Note that I'm neither a US nor a JP citizen, if that makes a difference.
2) I live in Japan but currently have the bulk of my investments in a US-based brokerage account (Schwab) for historical reasons.
This year a reputable company handled my taxes in both countries. I won't name them as this post contains my interpretation of what they told me, so I don't want to bring anyone any trouble.
What I have experienced is that the US withholds 10% of the (US based companies) dividends as tax. Then Japan taxes 20% of the rest. For a total of close to 30% of taxes on dividends (technically, 10% + 20%*90% so maybe closer to 28% total).
I was first taxed on the JP side. They looked at how much I received in dividends, minus fees and US withholding. Then they told me this was taxed at 20%. I asked them if this meant I would be able to claim back the 10% withheld from the US, to which they replied:
We will be sharing your finalized Japan Tax Return with our colleagues in US who will then work on claiming the foreign tax credit on your US Tax return for the double taxed income. Generally speaking, you should be able to claim the foreign tax credit on your US Tax Return for the amount of Japan tax paid on the double taxed income in both countries.
This was non committal, but I understood it as "yes, you won't be double taxed, and should be able to claim back the money that was withheld in the US, given that you are already paying taxes to JP for those US dividends"
When my US tax return came, I saw that none of the 10% withheld was coming back my way.
I asked the US folks if I was being double taxed, copy/pasting the statement from the JP folks. The US folks replied:
[...]Non-resident cannot claim foreign tax credit. Foreign dividend income is not taxable for US Non-residence. The US withheld of $xxx (on dividend income) is been reported as US tax withheld on your form 1040NR page 2.
Basically this isn't explaining much but it didn't seem like it was even a possibility for me to claim anything back on the dividend withheld tax.
I do not fully trust these people to do their job diligently to be honest. In their preparation work of my US tax return, they made a mistake for my nationality. I can see how it can be confusing that I live in Japan, have to report US income, and be neither of these nationalities, but it's just a copy/paste they have to do from a questionnaire that I filled personally. It's not a hard job, and that's after my return was delayed by weeks because it went through "managerial review". So multiple pair of eyes went through that yet they made obvious mistakes such as my nationality. But if I dn't want to have to navigate this legal maze, the only reasonable thing I can do is ask them to confirm that the double tax here is expected. And I believe they are saying that yes, this is how it works.
Bottom line is, unlike what I thought, US-based dividends are taxed at roughly for JP residents 30%: 10% in the US as tax-withholding, then 20% as dividends in JP. (I was hoping it would be the JP 20% only)
The US witholding impact on a typical portfolio, where dividends represent roughly 2% of gain per year, is an increase of 2%*10% = 0.2% on the portfolio fees.
So my Schwab indexes, with their super low fee of about 0.05%, actually cost me 0.25%.
Not the end of the world, but I feel this aligns with some of the fees we can see on "world index" ETFs in Japan.
The "good" news is that it means it's probably not even worth filing a US tax return just to try and claim those taxes back (for those who wouldn't have to file a US tax return otherwise), since that doesn't seem possible.
Would love to hear if people have different interpretations on this. Having gone through professionals for that I feel I got a pretty definitive answer, even if I find it surprising.
Categorically, the World Renowned company of which the OP spoke was categorically WRONG!
"What I have experienced is that the US withholds 10% of the (US based companies) dividends as tax. "
Yes, This is correct if you (or your broker) have filed the W8-BEN correctly
https://www.mof.go.jp/tax_policy/summar ... 1107a2.pdf
"Then Japan taxes 20% of the rest. For a total of close to 30% of taxes on dividends (technically, 10% + 20%*90% so maybe closer to 28% total)."
No, This is categorically the wrong way to calculate this. Japan taxes 20% of the Gross Dividend amount before US Withholding Tax
20.315% to be exact (15% National, 0.315% Reconstruction and 5% Residential Taxes)
Then you claim the Foreign Tax Credit in Japan for the 10% Withheld in the US
Kakutei Shinkoku Form B - Page 1 - Item 46-47
This has the effect of reducing the 15% National tax to 5% National Tax, meaning that the total amount with US and Japanese Taxes Combined is 20.315%
If the 10% cannot be completely deducted from the actual amount of National Tax, then the deduction is then applied to the Reconstruction Tax, and if there is still un-accounted-for deduction, then up to 30% of the 10% = 3% can be deducted from Residents' Taxes.
"We will be sharing your finalized Japan Tax Return with our colleagues in US who will then work on claiming the foreign tax credit on your US Tax return for the double taxed income. Generally speaking, you should be able to claim the foreign tax credit on your US Tax Return for the amount of Japan tax paid on the double taxed income in both countries. "
BS!!! If they (the world renowned company) told you that, you need to FIRE them!
"[...]Non-resident cannot claim foreign tax credit. Foreign dividend income is not taxable for US Non-residence. The US withheld of $xxx (on dividend income) is been reported as US tax withheld on your form 1040NR page 2.
Basically this isn't explaining much but it didn't seem like it was even a possibility for me to claim anything back on the dividend withheld tax."
BS!!! If they (the world renowned company) told you that, you need to FIRE them!
What they said is partially correct, but totally irrelevant in this case. This is not Foreign dividend income (from the US perspective). It is US Sourced Dividend Income, and the US has the right to 10% of it under the Japan US Tax Treaty, (15% or 20% under other countries' tax treaties with the US) or 30% if no tax treaty applies. (See Links at the bottom). As a US Non-resident Alien, the correct form is not the 1040NR, but 1042-S, which the Broker has to file with the IRS on your behalf.
As a Permanent Resident of Japan, you cannot claim the Tax Credit on the US Side. This will never come back. Japan US Tax Treaty - Article 10 - Paragraph 2(b) refers. Japan has First Call on your Tax AND the US has the right to 10% of your income earned in the US.
https://www.mof.go.jp/tax_policy/summar ... 1107a2.pdf
They Withhold 10% Tax on the US Side. this is unavoidable, unless you want them to withhold 30% instead.
You File in Japan for 20.315% Tax and then claim the Foreign Tax Credit for the US 10% here in Japan.
As a non-US Citizen or non-Green Card Holder, you do not get a 1040NR. You get a 1042-S, which is the US equivalent of a Japanese Gensenchoushuhyo for the taxes withheld in the US.
"The "good" news is that it means it's probably not even worth filing a US tax return just to try and claim those taxes back (for those who wouldn't have to file a US tax return otherwise), since that doesn't seem possible."
Yes. That is correct. The US is entitled to their 10% under the Tax Treaty, and there is nothing you can do by filing a US tax return.
https://www.irs.gov/individuals/interna ... -must-file
https://www.irs.gov/individuals/interna ... ithholding
https://www.irs.gov/individuals/interna ... fic-income
https://www.irs.gov/forms-pubs/about-publication-515
https://www.irs.gov/pub/irs-pdf/p515.pdf
See Page 3 - Withholding of Tax
In most cases, a foreign person is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%. A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States. The tax is generally withheld (chapter 3 withholding) from the payment made to the foreign person.
You have to correctly submit a Form W8-BEN to claim the reduced rate under a tax treaty between the foreign person's country of residence and the United States. I found that some brokers do this for you based on the information submitted when you opened the brokerage account, so you may not have seen the W8-BEN filed on your behalf. If the Tax Rate of Withholding is 10%, then that has been done.
https://www.irs.gov/forms-pubs/about-form-w-8-ben
"So my Schwab indexes, with their super low fee of about 0.05%, actually cost me 0.25%. "
If you are holding these funds in a Schwab Account, then get your 1042-S from Schwab, and claim the Foreign Tax Credit in Japan.
I see that Adamu referred to a page on the SBI Website regarding claiming Foreign Tax Refund. I didn't know about this.
It seems they do the paperwork to reduce the US Withholding from 30% to 10% for Japanese Tax Residents, file the W8-BEN on your behalf, and send you a Japanese Gensenchoushuhyo showing the US Taxes withheld, which is equivalent to the 1042-S, which they must file with the US IRS.
You take the amount of Foreign Tax Paid from this form and enter it in the Kakutei Shinkoku Form B - Page 1 - Item 46~47
IRMC
Oh, Strongly recommend
https://zaik.jp/books/472-4.html