Right now, I still hold Vanguard Emerging Markets Stock ETF (VWO) and pay the dividend withholding tax every year. I wonder if it would be better to sell VWO to cut the future dividend withholding tax. Before I continue, here’s some background:
- In a portfolio asset allocation update in 2007, I decided to use Lyxor ETF Asia Pacific Ex Japan listed at SGX (symbol: AEJ) to replace VWO for future purchase. But I still keep my VWO holding.
- As a result, I am still paying every year 30% dividend withholding tax on the dividend I receive from VWO.
- The dividend withholding tax is about USD10-15 every year.
- In my previous post on claiming back US dividend withholding tax on non-US equity ETF, I decided not to pursue that avenue to claim back dividend withholding tax for VWO, because my broker’s Form 1042-S does not list the necessary information and the dividend tax amount is small to worth the effort.
To get an idea of how much dividend withholding tax I would be paying if I were to hold it for the next 30 years, I calculated the cumulative present values of the tax in this spreadsheet Present value of VWO dividend tax (Google Docs) with a discount rate of 2.5%. The rate 2.5% is the interest rate of CPF Ordinary Account.
As you can see, the cumulative present values of the tax paid for the next 30 years are between USD200-300. Compare this with the broker commission of USD15 if I sell VWO, it seems logical to me to sell VWO to save on the tax. The sales proceed would be used to buy VWO’s replacement – Lyxor ETF Asia Pacific Ex Japan.
Does this make sense to you? Is the maths correct? Let me know and leave your comment, please.
Posted in Cost, ETF, Investing, Investment, My Portfolio, Portfolio Management, Tax
Tagged ETF, My Portfolio, Portfolio Management, portfolio pondering, Tax, VWO, Withholding Tax
UPDATE (Oct 27, 2010): Since April 2010, Saxo has been crediting dividends from London Stock Exchange to my account in full, without the 20% withholding tax.
After I consolidated my ETF holdings to Saxo
in June, the first dividend from my ETF in London Stock Exchange was declared in my Saxo account in July. But wait, how come they were taxed at 20%? They were not taxed at all when I held the ETF in POEMS. After I have sent an email to Saxo, the withheld tax was refunded to me before the pay date in August.
The second dividend was declared in October. Again, it was taxed at 20%! After a few emails to chase for the refund, it was credited into my Saxo account after the pay date.
The ETF pays dividend four times a year. It is going to be a pain if I need to email for tax refund for every dividend payout. And if Saxo decides not to refund withholding tax (e.g. change in custodian structure), it may be time to do another account transfer, sigh…
A reader asked me in email how I invest in ETFs that are not listed in Singapore Exchange. I replied that currently for Vanguard Total Stock Market ETF (VTI) that is listed in the US, I use optionsXpress Singapore; for iShares DJ STOXX 50 ETF (EUN) that is listed in London Stock Exchange, I use POEMS. However, this may change as I am considering other low cost brokers to consolidate my ETF holdings. I will write on this if there is any update.
In my reply to the reader, I also included sgfunds.com topic “Seek Help in Investing in Foreign ETFs“, which has some information on foreign ETF trading, tax and charges.