Does the withholding tax seriously affect the PP performance?

[Pat]

I am living in Asia (non-US citizen). I asked a security house (which offer US stock/securities) in respect of the relevant US-tax law applicable to me and was informed that I am not subject to capital tax (profit on trading profit) but I am subject to withholding tax on dividend which is 30%(I don't know whether withholidng tax also apply to interest derived from TLT - assuming yes).

In fact, I prefer the US market and plan to implement PP in US market. I just wonder whether this 30% withholding tax could seriously affect the PP performance?

My feeling is that the stable performance of PP is due to the capital gain of individual asset under specific economic situation. The dividend (or interest derived from TLT) only contributes very very very little profit to the performance of PP.

Anyone can share you view with me?

Is there any backtesting which taking into account the effect of the 30% withholding tax on the dividend/interests?

Thank you

[craigr]

I am not an tax law expert, but I suspect you can apply to get this amount refunded back to you as a foreign tax credit, yes? So the result may be you have some funds held until end of year to apply for them, then they would be released.

Then again, the advice you received could be due to new FATCA rules that impose heavy sanctions on banks that are not in compliance with onerous new US reporting rules. You can still apply to get the funds back, but I am not familiar with the process.

My feeling is that the stable performance of PP is due to the capital gain of individual asset under specific economic situation. The dividend (or interest derived from TLT) only contributes very very very little profit to the performance of PP.

That has been my experience running the US based portfolio.

With that said, you should probably talk to a qualified tax professional familiar with your situation for advice.

[escafandro]

It depends if your country have a tax treaty with U.S.
I paid the full 30% withholding tax and I think its not a big issue. Mostly because only impact heavy in Bonds. Maybe you can set the stock part to growth cap to attenuate the impact of dividends too.
But a backtesting would be really appreciated indeed.

[Pat]

Thanks Craigr and escafandro for the sharing.

I live in Hong Kong and already checked with my stock broker who confirms that I have to pay the full 30% withholding tax on dividend and interests (but capital gain is exempted so long as I fill in W8-BEN form).

I prefer US market for my PP implementation because I can find comprehensive research material regarding US based PP in the web and other material.

To minimize the impact of US withholding tax on the portfolio, my intended permanent portfolio will include only two US ETF (i.e. TLT and SPY). For the remaining asset classes (i.e. gold and US dollars), I will just hold physical gold and US cash deposited in bank.

Accordingly to goggle finance, the dividend yield for TLT and SPY is quite low (2.84 and 1.97 respectively) which is good to me in view of the withholding tax imposed. I guess (just my feeling) if I implement the above plan, the 30% withholding tax will not have material adverse effect on the PP even on long run.

[escafandro]

Sorry, I forgot.
If you buy 30-year bonds individually (not through TLT) you do not have to pay the 30% withholding U.S. tax.

[Pat]

Thanks escafandro

I can buy Treasury Bond through etrade (which has office in Hong Kong). In order to enjoy such exemption (i.e. exemption of 30% withholding on interest), can I buy T-Bond through etrade? or I have to buy directly from TreasuryDirect (i.e I need to open account at TreasuryDirect) in order to enjoy such exemption on T-bond?

Is it a refund mechanism (i.e. US Gov will withhold the 30% first anyway and then I require to do some papers filing to the US gov in order to get the 30% withholding back)?

Do you think I need to obtain Taxpayer Identification Number first to get the exemption?

Sorry for so many questions. I am new to PP. I hope to grasp some general idea before I talk to a tax advisor (indeed, I don’t know whether a tax advisor will entertain me as I am not a high net-worth person).

[escafandro]

I don´t know how your broker do the purchase of the bonds. I have a Schwab account and I buy the treasuries free of commissions.
It´s not a refund mechanism, you don´t have to pay the tax and you don´t have to fill any document. The interest is deposited in your account completely and without discounts.
But maybe and here you would have to check your local tax laws, you may have to pay an income tax for this interests in Hong Kong (for example I pay a 35% of income tax on interest and dividends from investments made out of my country)

[Arturo]

In fact, I prefer the US market and plan to implement PP in US market. I just wonder whether this 30% withholding tax could seriously affect the PP performance?

Hi Pat,

have you analyzed the impact of exchange risk over your PP as a Hong Kong citizen?

regards

[Pat]

Thanks escafandro again for the information. Your information is very valuable. I will check these points with local broker/local tax advisor.

Hi Arturo,

have you analyzed the impact of exchange risk over your PP as a Hong Kong citizen?

HK dollars is pegged to the US dollars (it is also one of the reasons that I prefer US based pp). Therefore, unless extreme circumstance arises, there is no exchange risk at present. Thank you for your point.