RetireJapan

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.

My understanding is that you can claim back the Japanese tax for the 10% you paid to the US, not the other way around. I think the tax office can do this fairly easily (but not for NISA as there is no Japanese tax to offset).

RetireJapan wrote: ↑Wed Jun 05, 2019 8:17 am My understanding is that you can claim back the Japanese tax for the 10% you paid to the US, not the other way around. I think the tax office can do this fairly easily (but not for NISA as there is no Japanese tax to offset).

But if you see what the JP folks told me, they told me exactly the opposite:

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.

But that is strange as it is not how the double taxation agreement works in my understanding. Basically whatever you do paid in the usa should be a credit in your Japanese tax return. So it should definitely happen here. I deduct them in my tax return and there are no issues.

Yep, I agree and it was initially my understanding as well (that I could deduct them from one or the other, except I wasn't sure which one). I've received a vastly different answer (at least in practice, in how they handled my tax returns) from one of the biggest companies in that field.

Edit: mule96, wondering if you had a review of your tax return with the tax office and they told you it was ok? Or is it just that you have done it this way so far and nobody has told you it was incorrect?

The first time it was done by a tax advisor now I do it myself. But it is also the same from my company when we report earning back to the home country (it is not the usa, but another country with a double taxation agreement with japan). We pay taxes on our profit in Japan, my parent company then can use that as tax credit when on their total earning back home. Imo that is how most double taxation agreements work, but I am not an expert on such stuff.

Based on your reply I was going to get back to the JP tax guys in order to ask them for a clarification, but I saw that I had already asked the question and this was their reply:

My question:
As mentioned in my previous email, I thought the way to declare the US taxes on dividends was to declare the full revenue of dividends to Japan and claim the US withholding of 10% as foreign tax credit to Japan. You explained to me it actually works the other way around: you are declaring the dividends revenue minus the US withholding, and your US colleagues will then claim JP tax credit in the US to see if I can get something back from the US. Was my initial idea incorrect (probably, can you explain to me why?), or is it a choice?


Their answer:
Kindly note that as far as you are paying tax on a mutual fund, it has to be netted off against the dividends received from such mutual funds. It is not possible to claim a 10% foreign tax credit unless you are paying foreign tax on a specific stock (e.g Microsoft stock).

My understanding is that they say I can only declare foreign tax credit if I was getting dividends on "specific" stocks rather than an ETF. This makes no sense to me but this is how I interpret their answer.

I am not sure how it works with mutual funds. But an ETF is not a mutual fund. I did tax credits for etfs, but never for mutual funds, so I am not a 100%.

Below is how I have done with US securities in Japanese brokerage (Rakuten Tokukei account),
- US company pays dividend X and US withholds 10%
- JP Rakuten deducts 20.yy % of X and credits the remainder to my account (I believe it is 20.1%?)
- I do a kakutei Shinkoku tax filing during tax season and mention the total dividend amount and the amount withheld by US. The final tax amount calculated automatically adjusts for the amount already paid in US.

P.s. My status is Non-US person resident in Japan.

I am not sure if your situation changes because you hold the securities in a US brokerage account. Also, I could be wrong but my understanding was that dividends outside of a Tokukei account from Japanese broker gets clubbed with your regular income and effectively gets taxed at your marginal tax rates.

This is a mess and in general I think you are going to find there is no way to get around at least some double taxation. My situation is different because I am a US citizen living in Japan (full tax residency in Japan) and so when I file taxes in Japan I am informing them of the dividends in my US accounts (e.g. Schwab) and also when I file in the US informing the IRS that Japan is taxing me on those US dividends. Here is my take:

1) The big accounting firms have a lot of experience but after having used 3 different firms in Japan and 4 in the US in recent years I find they all make mistakes. The largest firms also tend to be a little conservative in their interpretation of tax law. Most remarkably, they never come up with identical answers for total taxes due, but that is taking into account more than just dividend income.

2) When I file taxes in Japan I am reporting US dividends on 「外国税額控除に関する明細書」 under 「外国所得税額の内訳」 with a single line that gives the total US dividends received under 「相手国での課税標準」 but automatically only counts 10% of that figure as tax under 「左に係る外国所得税額」. In the US I'm actually paying 23.8% of federal tax on those dividends but Japan doesn't care because the 10% is designated by the Japan-US tax treaty (at least that's how they interpret it).

3) That 10% then gets fed into the calculation of my foreign tax credit in Japan (外国税額控除) but depending on how the calculation works out I might not get all of it back. This last year I got relatively little back.

4) When I file in the US I report the approximately 10% (20.315% - 10% from the 外国税額控除 form) to try to claim the foreign tax credit. Because the amount isn't exactly 10%, or even 10.315%, I ask my Japanese accountants to give me a letter with the actual amount. I use that as the basis to claim a foreign tax credit in the US. That calculation also does not result in me getting all 10% back because of Alternative Minimum Tax (AMT) calculations and the mysteries of the math behind the foreign tax credit.

5) My guesstimate is that I pay a bit more than 35% tax on US dividends between the two countries and the exact percent changes each year because the AMT calculation changes each year.

No question that we are double-taxed especially when income somehow falls under both Japanese and US taxes.