Just had my first encounter. Here’s a
link that explains it.
Questions:
- Since the ADR is held inside a Roth, is there an easy way to recover that tax?
- Is it wiser in tax-sheltered accounts to invest in foreign stocks thru U.S. domiciled
funds? Do funds employ measures that mitigate or eliminate the tax for such accounts - or are the taxes simply hidden as “other expenses”?
- If you really liked a foreign stock (and the currency hedging aspect) could you still justify owning the ADR in a tax-deferred account while paying the tax?
Comments
Anyone know if U.S. capital gains tax law would be the same for an ADR?
From robockman1 - “The foreign tax withholdings are lost money in an IRA.” - But wouldn’t that also apply to a fund like DODFX? Wondering if that “lost money” just isn’t noticed because it’s hidden inside the “other fund expenses.” ?
The US funds with foreign holdings may pay foreign tax that is included in your yearend 1099. You may claim tax credits for those. If more complicated foreign holdings, you may have to include the Form 1116.
While we are at it:
The ADRs can be company-sponsored or noncompany-sponsored.
The US ADRs (tickers ending typically in "Y") are traded normally, without extra exchange fees (about $50 per trade) for foreign listings on the Pink Sheets/OTC (tickers ending typically in "F"). Examples that have both include VW (VWAGY, VWAPY; VLKAF), Porsche Holdings (POAHY, POAHF), SoftBank (SFTBY; SFTBF), etc.
Fido has a basic link on ADRs.
https://www.fidelity.com/learning-center/investment-products/stocks/understanding-american-depositary-receipts
“One issue with ADRs is when the tax treaty rate is lower than the foreign country’s domestic withholding rate. Switzerland has a domestic foreign withholding rate of 35% and a 15% tax treaty withholding rate with the U.S. However, to qualify for the 15% tax treaty rate, investors must file paperwork with the Swiss government beforehand or be subject to the full 35%. If they do not do this ahead of time, the Swiss government will withhold 35% ”
Source
From @yogibearbull - ”The US funds with foreign holdings may pay foreign tax that is included in your yearend 1099.” That’s encouraging within the context here. Right? Doubtful many of us file to reclaim taxes our funds pay on holdings outside the U.S.
Thanks for the Fidelity link Yogi. However, it didn’t get very deep into the weeds.
After @msf is fully recovered from ingesting smoke I hope he’ll be able to weigh in as well.
Unless I'm not understanding (which is verrrrry possible), I'm thinking ADR is under-the-covers info I can do without.
There is no tax filing to tax-deferred accounts, nor there is any 1099 for them, so that tax paid is lost, or cannot be claimed.
If it helps any … The annual dividend payout on my ADR amounted to about 2.5% of its value. So I was hit with a 15% tax on that 2.5% payout. Hardly seems enough reason to sell a stock that’s been a good steady-eddy. Or to move to a taxable account with the (than taxable) trading implications. As a portfolio component this stock equals a bit less than 5% of portfolio.
Not a math genius. But I think the tax we’re talking about amounts to: 15% of 2.5% of 5%
Have a good day, Derf
I did have 1 additional thought … While none of us likes paying taxes, owning this company inside an actively managed fund would likely command a 1% or greater management fee. Without doing the math, I suspect that would work out to more than a 15% annual foreign tax on just 2-3% of the asset’s value.
Not to deny the benefit to owning said stock in a taxable account (rather than IRA), but the tax headache from frequent trades would be troublesome for me.
Reminds me of calling "Customer Service." THERE'S an oxymoron. TRP does not clear the trades. It's Pershing. But I can't get to Pershing. I have to talk to TRP. ...Like all those times when you talk to the phone "specialist" at Customer "Service." They have to put you on hold to find out what to do and what exactly to TELL you, waiting patiently. Because they know nothing. And the ones who hold the cards are not accountable, and are not even connected.
Turns out, I paid a 25% tax "withheld at the source." Norway, in my case. (NHYDY.) Not happy about it, but the dividend is worth keeping. That's on top of the fee that TRP stole from me, as well. (For dealing with a foreign dividend.) NHYDY typically pays the dividend only once per year, in May.
https://www.mutualfundobserver.com/discuss/discussion/61160/ork-wtf-transaction-trp-got-an-answer#latest
After reading your post, I feel fortunate to have selected to buy a stock a country (Switzerland) that’s signature to a treaty with the U.S. and Canada reducing their customary foreign tax to “only” 15%. It appears from your post that Norway is not part of that pact. Uhhh.
A gleam of optimism lies in the excellent commentary from @msf above. From that I discern that if you invest in a foreign country you’re going to get hit with some type of foreign tax - but that this is disguised (or passed on to you) in different ways by mutual funds and not easily discerned by fund holders.
And @rabokma1 was perfectly correct in that tax-deferred accounts like IRAs are not the right place to own a security that is going to be taxed anyway. However, if you own any foreign securities through a mutual fund, truth is you are also getting hit with a “foreign tax” in some manner. So technically, rabokma1’s tax specific advice might appear to apply to mutual funds as well.
@Crash - That 25% hit you encountered is an eye-opener for us all. As far as TRP goes, on the mutual fund side customer support has been abysmal for a long time. But I can’t speak for their brokerage side, having never dealt with it. BTW - There was a very small “foreign transaction fee” posted at Fidelity related to the dividend payout. Not worth mentioning. Pretty common for fiduciaries.
One correction on my part. My previous assertion that a 15% tax on the asset value of a foreign fund might not be any more oppressive than a 1% ER on a foreign fund was incorrect, Actually, working that through in my head, the 15% tax on dividends would probably amount to 2-3 times as much (in dollar terms) as a 1% ER would.