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Withholding on payments to foreign persons

I asked my stockbroker why part of my dividend payments were being witheld, despite the fact that I had filled in form W-8 declaring that I am not a US citizen. It turns out that there is a tax witholding on certain payments to foreign persons, including dividends. I am lucky that the UK has a treaty with the US meaning this is a mere 15% instead of 30%.

I imagine this highway robbery marginally reduces foreign investments. I wonder what interesting forms of taxation will surprise me next.

21 comments to Withholding on payments to foreign persons

  • Paul Marks

    The United States is a vast country which (for a very long period of time) followed a relatively (relatively) good line of policy.

    However, the present insanity (such as the absurd tax levels and regulations – both on individuals and companies) is bound to undermine the United States eventually (I am astonished that it has not already done so).

    Sadly a minority of American “libertarians” are part of the problem (not the solution) – obsessed (like some bad Hollywood film) with the wickedness of “the rich” (basically any investor or “unearned income”) and “big business”).

    Ending the nutty regulations and taxes is not going to be helped by these people.

    As for doing business in the United States – even very large enterprises have found that it can be fatal (due to arbitrary statism).

    What chance does a small investor have?

  • Paul Marks

    “But the returns Paul – the American stock market is doing so well!”.

    And the path to the slaughter house (in Britain as well as the United States) is lined with breadcrumbs.

  • jdm

    As a US citizen and investor in foreign stocks, foreign taxes are withheld from my dividends as well. Offhand, 15% for Canada, 30% for Italy and everyone else somewhere in between – mostly 15% tho’.

    BTW, the foreign taxes paid are directly deductible from my US taxes as opposed being deductible from my income, so there is that.

  • jdm

    > What chance does a small investor have?

    As much as anyone else.

  • Nick (Blame FrenchMEN) Gray

    Q. How do you end up with a small fortune, in Australia?
    A. Start off with a large one!
    A lot of rules stay on the books because nobody can be bothered to repeal them, and they might be useful one day! You Americans will be sorry you repealed all those slave laws, if slavery makes a comeback!

  • Paul Marks

    “As much as anyone else” – or as little as anyone else.

    All my life (and for much longer)the percentage of British companies owned by individuals has been shrinking – in 1965 it was still (just) a majority, now it is about 20%. So hired managers in companies are responsible to hired mangers in pension funds (and other such) often no real OWNERS any more.

    This situation has been created by taxation (high income tax, Capital Gains Tax and the Death Tax) and regulation (also present in the United States – and having similar effects) the Financial Times (which hates owners) thinks it is wonderful – and I think it stinks.

    As for the small investor in London (and, no doubt, New York also) – honour and reputation has been replaced by thousands of pages of government regulations (in Britain this government take over was given the Orwellian name of “deregulation” – yes thousands of pages of regulations are “deregulation”, after the [government court mandated] “Big Bang” destroyed the “restrictive practices” of the old private partnerships, companies and associations.

    There was no law against setting up rival stock exchanges (or trading “off exchange”) but there had to be “Big Bang” (the end of independent stock brokers responsible to their clients, and independent stock “jobbers” who sold the shares for companies) and thousands of pages of government regulations.

    The result?

    Well if big investors really are treated the same way as small investors are in the City of London (and in New York) then NO ONE should be in the markets.

  • Lee Moore

    Goodness Rob, you really are a tax innocent. Withholding taxes have been around pretty much since the Sumerians, and as taxes go they’re hardly very wicked. The country in which the dividend (or interest) payer lives wants to tax the interest or dividend. And why shouldn’t it ? The source of the income is in that country, and taxation by source is much older as a principle than taxation by residence. The development process went like this -

    1. withholding taxes were imposed on all payments (of things like interest, dividends, rent, royalties) to everybody
    2. for local residents who could be taxed on a residence basis, the withholding taxes could be credited against tax on assessed income, including the dividends and interest
    3. as an administrative simplification withholding taxes on payments to local residents might be abolished because the tax authority was confident that it could collect in full when the tax by assessment was paid, but this wouldn’t work for payments to foreigners
    4. Then Country A which was withholding taxes at 30% on payments to all foreigners might do a deal with Country B which was withholding taxes at 30% on payments to all foreigners, to the effect that Country A would only deduct 15% (or 0%) on payments to residents of Country B, so long as Country B agreed to do likewise, mutatis mutandis. So long as dividends and interest in both directions were roughly the same, the total amount of taxes collected would be roughly the same, and the admin would be less. But Country A would only be waiving its taxes on Country A dividends paid to Country B, because it expected roughly equivalent collections on Country B dividends to residents of Country A. There was certainly never any suggestion that Country A should waive taxes on foreigners because it was fair or just to do so.
    5. Though it might (when more enlightened pols were in charge) be thought that it might be EXPEDIENT to lower taxes on foreigners to encourage investment. Hence agreements might be made which were not expected to be reciprocal in their tax effects. And occasionaly withholding tax might be waived altogether for these reasons – eg the portfolio interest exception.

    But it’s sweet that you should have come so far in life without withholding taxes impinging on your consciousness. It puts me in mind of a lovely conversation with my brother in law who is a born and bred Hong Konger, and by no means a financial innocent. i was explaining ISAs and pension funds, and so on. After a while, i realised that he wasn’t following at all, and that the key piece of information that I had omitted to mention was that in the normal course of events, and in most of the world except for the paradise that is Hong Kong, dividends and interest were taxable. So I mentioned that and he flatly refused to believe me. I repeated it several times with the same effect. He thought I was pulling his leg. Only when his sister assured him that I wasn’t joking did he eventually appreciate the terrible truth. He went home from supper a sadder and wiser man.

  • PersonFromPorlock

    Time once again to cite Heller’s Great Dictum: “They can do anything to you that you can’t stop them from doing.”

  • jdm

    > [heckuva rant snipped] then NO ONE should be in the markets.

    I’ll just keep on doing what I’m doing, in the markets, if you don’t mind.

  • Laird

    @ Lee Moore: What you say is certainly true with respect to the imposition of taxes, but as far as I know withholding at the source is a fairly recent invention. In the US it only came into being during World War 2. Is it older than that in Britain or other countries?

  • Paul Marks

    jdm – if you are cheating people I do mind, if you are not cheating people I do not mind (not at all).

    You know well that “the markets” (such as the stock markets) are bubbles pushed by the Central Banks (such as the Federal Reserve). And that such things as the gold and silver markets are riddled with what ordinary people would call “fraud” (although it may not be fraud in the sense of violating the vast web of government regulations).

    What you choose to do with your own money is entirely your own affair – naught to do with me.

  • Lee Moore

    Laird – one of the leading UK cases on the distinction between “short” interest and “yearly” interest dates from 1889. Since you have to withhold tax on yearly interest but not on short interest, there must have been a withholding obligation by 1889. I think there’s another case from the 1850s, which is close to the original* imposition of income tax, so I assume it was there from the word go.

    * original except for a couple of previous trial canters, notably during the Napoleonic Wars.

  • Laird

    Lee, payroll tax withholding wasn’t introduced in the US until 1943. It appears to have been instituted in England in 1803 (although there may have been a few very specialized applications of the concept earlier than that). I haven’t located anything about its history in other countries (although I didn’t try too hard). Nonetheless, I’m pretty certain that it’s a relatively recent historical development, and your assertion that “withholding taxes have been around pretty much since the Sumerians” is a gross exaggeration.

  • jdm

    if you are cheating people I do mind, if you are not cheating people I do not mind (not at all).

    Some people might wonder from where this came from. It also might be perceived as an unseemly insinuation seeing as how you don’t know me from Adam. Thirdly, since the discussion revolved around investing (in stocks/bonds), I’m unclear as to my opportunities to “cheat people”. Perhaps if you were to outline these options, I might see new avenues for investment.

    I also do *not* know ‘that “the markets” (such as the stock markets) are bubbles pushed by the Central Banks (such as the Federal Reserve)’; I can, however, understand that, with this perspective, you would recommend “NO ONE should be in the markets”.

  • Lee Moore

    “your assertion that “withholding taxes have been around pretty much since the Sumerians” is a gross exaggeration”

    Not an exaggeration, a joke. But the point was that unless Rob is very old indeed, US withholding on dividends to foreigners is older than he is. People started using the Dutch Antilles to “treaty shop” their way to lower US dividend withholding in the mid 1950s.

  • Lee Moore

    I should have added that that was an interesting article you found there, Laird. Seems that although there wasn’t yet a comprehensive income tax, particular types of income already had taxation at source applied to them as early as the sixteenth century.

  • Paul Marks

    jdm.

    You do know that the stock markets (and the real estate markets and so on) are bubbles pushed by the Central Banks – because you know about the policy of monetary expansion.

    If you do not know then you have been living on the planet Mars since 2008 – and I believe this to be unlikely.

  • Paul Marks

    I may be on more dodgy ground saying that small investors are ripped off more than big investors.

    After all Mr Madoff specifically targeted big investors (he was not interested in robbing poor people – because they did not have much money for him to steal).

    However, things are now so complicated (and expensive) in places such as the City of London that the traditional small investor (getting tips from their independent stock broker, who they paid directly, or going along to shareholder meetings to exercise long term influence over a company) is really a thing the past.

    The Financial Times thinks this is wonderful – with managers (in most cases)totally free of the influence of non institutional investors.

    As a general rule of thumb….. things that the Financial Times is happy about are bad.

  • jdm

    You do know that the stock markets (and the real estate markets and so on) are bubbles pushed by the Central Banks – because you know about the policy of monetary expansion.

    Hmm, markets are bubbles, yeah? That’s just silly.

    If we have a difference of perspective that far from each other, this discussion is not going to go anywhere interesting. I’ll concede this discussion to you and continue to invest as I see fit – which is fully.

  • Julie near Chicago

    The point is that stock prices and real estate prices are both inflated because of the Central Banks, including the U.S. Federal Reserve, keeps expanding the money supply.

    The Dow is running numbers out beyond the orbit of Neptune and people are going crazy when it dips, even though it stays about 17000 — seventeen thousand!!

    We all have to hope that our retirement funds — most of us have some kind of mutual funds — stay ahead of “prices in the shops” in money terms. The bubbles do burst sooner or later, and when they do it’s called a crash. Bottom drops out of the stock market, and a guy who sells his house (if he’s lucky enough to be able to) has to come up with the difference between the pittance he gets from the sale and the amount he still owes on the mortgage.

    Meanwhile, as long we’re all lucky and the market bubble grows keeps up with prices in the shops, we get to pay ever-higher marginal tax rates on our “income.”

    And then, of course, we lucky people west of the UK and south of Canada but north of Mexico get to pay 25% on capital gains this year. It’s a laugh a minute!

  • Paul Marks

    Julie – the City people are intelligent (far more intelligent than I am – they have not been hit over the head so many times).

    They must know all this.

    So when they pretend they do not know, they might as well be carrying a big sign saying “I am a conman – give my your money and I will rip you off”.

    This is why I do not bother with long descriptions with them – they know the details of this con better than I do (vastly better than I do).