Tag Archives: VWO

Sell VWO to cut future dividend withholding tax?

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:

  1. 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.
  2. As a result, I am still paying every year 30% dividend withholding tax on the dividend I receive from VWO.
  3. The dividend withholding tax is about USD10-15 every year.
  4. 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.


Claiming back US dividend withholding tax on non-US equity ETF

As I am not a US citizen, the dividend that I receive from US-listed ETF are subject to 30% withholding tax. It is OK for US equity ETF, such as Vanguard Total Stock Market ETF (VTI) that I own, because the dividend originated from US companies. However, for non-US equity ETF, such as Vanguard Emerging Markets Stock ETF (VWO), the dividend is also subject to the withholding tax. Is there a way to claim back this withheld tax on non-US equity ETF from Uncle Sam?

How to claim?

Well, a Taiwanese investor/blogger by the name of greenhorn has successfully claimed back withheld tax for non-US equity ETF dividend. He detailed the steps in Filing for Tax Refund with Form 1040NR (sorry, it is written in Mandarin). To be able to do this, you need Form 1042-S that you broker (hopefully) send you every year, and the form must show that you have overpaid the tax, as shown in the figure below (from the above article by greenhorn).

Source: greenhornfinancefootnote.blogspot.com

Source: greenhornfinancefootnote.blogspot.com

To be specific, in item “Income Code 06”, Gross Inome (Box 2) should only include US-sourced dividend (e.g. VTI), such that Gross Income (Box 2) times 30% should be less than U.S. Federal tax withheld (Box 7), i.e.

B*30% < C

The difference (C – B*30%) is the overpaid tax that you can claim back. This is good news to me as I can now claim back the withheld tax of my VWO.

But …

However, my 2007 Form 1042-S from optionsXpress shows that A*30% = B, as shown below.

Form 1042-S from optionsXpress

Form 1042-S from optionsXpress

This means optionsXpress does not differentiate between US- and non-US-sourced dividend. My VWO dividend was included in the Gross Income (Box 2) and therefore, I could not claim back my withheld tax from Form 1042-S. The form does not show that I have overpaid the tax, as A*30% equals B.

This is not unique to me, as others have reported that their brokers also include both US and non-US sourced dividend as Gross Income in their Form 1042-S. In Filing for Refund of Overpaid NRA Withheld Tax with Form 1040NR, readers of the article reported that Zecco and MBTrading are two of the brokers that do this, making the Form 1042-S not suitable to claim back withheld tax. Other readers and the blogger greenhorn himself reported that Form 1042-S from eTrade and FirstTrade do differentiate between US- and non-US-sourced dividend, hence effective for claiming back withheld tax.

So, for me, I gave up this avenue to claim back withholding tax on my VWO dividends.