I agree with all of you on the “necessity” of L1WT for states (sorry, didn’t express myself precisely), I just don’t get why there can’t be a mechanism for IE-investors to reclaim the 15% they are obviously owed. It seems so utterly anachronistic in world of globalized finance.
Because it’s not that obvious: the States want to get paid, so if they drop the witholding taxes, some other country would have to compensate them for it. Ireland doesn’t tax foreigners’ gains on Irish ETFs, so they have no reason to reimburse it themselves. The investor’s country does tax its investor’s gains (in most cases) but using those taxes to reimburse the US would mean:
- Accounting for the taxes witheld from all taxed investors in each individual ETF separately.
- Comparing the taxes witheld to the taxes paid to see if the taxes paid exceed them.
- Aggregating the funds and reimbursing the ETF provider of that amount.
- Having the ETF provider reimburse the US for the lost witholding taxes.
And that would mean for Ireland to have a tax treaty with every country people investing in IE funds could be residents of. Failing that, some of the tax witheld from the US could not be reimbursed to those specific investors.
For the tax domicile of the investors, this is a loss of taxes (they are the one providing the money to pay the US) and administrative hell.
For Ireland, that means tax treaties with every country possible, getting them all to agree to go through the administrative hell and tax loss previously stated.
For Irish funds, that means an accounting nightmare, that would probably cost higher fees, which would make them less competitive.
For the investor, that’s a tax declaration burden and probably a higher TER on IE funds.
Nobody has had high enough an incentive to make that happen as of now and I’m not sure it would really benefit the investor in the end if it was made to happen.
Easier is using US domiciled funds to invest in US companies and not to invest in Japan outside of tax sheltered accounts (for swiss investors).
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This sounds very reasonable indeed, thanks!
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One approach that would make sense to me is for IE funds to provide an audited report of paid L1WT. Swiss tax authorities could then provide a tax credit (like with DA-1) based on these reports (which should become part of ICTax). I.e. DA-1 could be more fine-grained, providing credit for parts of a fund. This wouldn’t require any new tax treaties, ‘just’ a reporting system that at least EU and CH agree on. This would still increase complexity.
The alternative would be for Switzerland to grant a flat deduction to approximately compensate for withholding taxes that cannot be declared. If I remember correctly, there are countries that have such a flat compensation for funds.
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Well, they do provide this as part of their (semi-) annual financial statements, don’t they?
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I don’t know whether it’s detailed enough (associating withholding taxes with specific dividend distribution dates). However, even if it is, it would have to be in a form that the tax authorities could (automatically) process. I don’t know whether a standard format for this already exists anywhere, and I don’t think ICTax has any provisions for this. It might even need small tax law changes in Switzerland. It would likely be possible if there was sufficient interest by all relevant parties, at least in theory.
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