International investing using USD

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Topic Author
guesto
Posts: 24
Joined: Fri Dec 18, 2020 11:23 am

International investing using USD

Post by guesto »

Hi everyone,

I'm a non-US investor, using Interactive Brokers. I want to include stocks from several non-US markets in my portfolio, and buy them regularly, but I don't want to pay for currency conversion of several different currencies all time. Is there an efficient way to buy non-US stocks using USD?
I know of the existence of ADRs but I don't want to use them since they're not tax efficient, I don't want to pay dividend tax to the US for a foreign stock..

Thanks for any advice
daze
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Joined: Fri Mar 08, 2019 1:09 am

Re: International investing using USD

Post by daze »

Last time I check, ADRs do not pay dividend tax to the US. However, they do pay tax to their own governments prior to pay out dividend.
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Anon9001
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Re: International investing using USD

Post by Anon9001 »

daze wrote: Wed Dec 23, 2020 1:15 pm Last time I check, ADRs do not pay dividend tax to the US. However, they do pay tax to their own governments prior to pay out dividend.
This is from personal experience?
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galeno
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Re: International investing using USD

Post by galeno »

VWRD is all you NEED. Buy it on the LSE.
KISS & STC.
Topic Author
guesto
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Re: International investing using USD

Post by guesto »

daze wrote: Wed Dec 23, 2020 1:15 pm Last time I check, ADRs do not pay dividend tax to the US. However, they do pay tax to their own governments prior to pay out dividend.
Right here (and in a bunch of other places) it says otherwise:
"Any dividends paid by the ADR are generally taxable, just like dividends on U.S. shares."
glorat
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Re: International investing using USD

Post by glorat »

guesto wrote: Wed Dec 23, 2020 8:11 am using Interactive Brokers... but I don't want to pay for currency conversion of several different currencies all time
But Interactive Brokers charges the most negligible amounts for currency conversion. We're talking less than 0.01%. Is there really a problem here?

I doubt any other proposed "solution" is going to be cheaper than IB's currency conversion.
daze
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Re: International investing using USD

Post by daze »

Anon9001 wrote: Wed Dec 23, 2020 2:24 pm
daze wrote: Wed Dec 23, 2020 1:15 pm Last time I check, ADRs do not pay dividend tax to the US. However, they do pay tax to their own governments prior to pay out dividend.
This is from personal experience?
According to my experience, holding TSM ADR via Interactive Brokers, the dividend was subjected to 20% withholding by Taiwan but not subjected to 30% withholding by US. (I think Taiwan government raised the tax rate to 21% recently.)

I've heard some brokers such as Firstrade withheld 30% indifferently despite it's ADR.
daze
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Re: International investing using USD

Post by daze »

guesto wrote: Wed Dec 23, 2020 7:45 pm
daze wrote: Wed Dec 23, 2020 1:15 pm Last time I check, ADRs do not pay dividend tax to the US. However, they do pay tax to their own governments prior to pay out dividend.
Right here (and in a bunch of other places) it says otherwise:
"Any dividends paid by the ADR are generally taxable, just like dividends on U.S. shares."
I suppose the article was written for US-based investors.
For NRA, it's another story.
Topic Author
guesto
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Joined: Fri Dec 18, 2020 11:23 am

Re: International investing using USD

Post by guesto »

glorat wrote: Wed Dec 23, 2020 11:04 pm But Interactive Brokers charges the most negligible amounts for currency conversion. We're talking less than 0.01%. Is there really a problem here?

I doubt any other proposed "solution" is going to be cheaper than IB's currency conversion.
There is a minimum conversion fee of $2 that I don't want to pay each month for every different currency. Of course, I can decide each month to focus on one other currency (in addition to USD) and rotate between them, but I'm looking for a simpler solution.
daze wrote: Wed Dec 23, 2020 11:24 pm I suppose the article was written for US-based investors.
For NRA, it's another story.
I couldn't find info about that but something still doesn't add up for me.
Let's say for now that the US doesn't collect any additional taxes (which is something I'm still not convinced about), how much do you pay for the foreign withholding fee?
Is it computed based on the non-treaty rate, the US treaty rate, or your country's treaty rate? The third option doesn't make much sense in my opinion, and I think the second is most likely correct. If that's the case, then for example in the case of Taiwan that you mentioned, you might be paying 21% instead of 10% when holding directly, if your country has an appropriate tax treaty.
glorat
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Re: International investing using USD

Post by glorat »

guesto wrote: Thu Dec 24, 2020 12:47 am
glorat wrote: Wed Dec 23, 2020 11:04 pm But Interactive Brokers charges the most negligible amounts for currency conversion. We're talking less than 0.01%. Is there really a problem here?

I doubt any other proposed "solution" is going to be cheaper than IB's currency conversion.
There is a minimum conversion fee of $2 that I don't want to pay each month for every different currency. Of course, I can decide each month to focus on one other currency (in addition to USD) and rotate between them, but I'm looking for a simpler solution.
Good luck finding another option that will cost you less than $2. If the underlying is in a different currency, *somebody* is doing the conversion and they will probably charge more than IB for the added service of doing it for you.
daze
Posts: 39
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Re: International investing using USD

Post by daze »

guesto wrote: Thu Dec 24, 2020 12:47 am
glorat wrote: Wed Dec 23, 2020 11:04 pm But Interactive Brokers charges the most negligible amounts for currency conversion. We're talking less than 0.01%. Is there really a problem here?

I doubt any other proposed "solution" is going to be cheaper than IB's currency conversion.
There is a minimum conversion fee of $2 that I don't want to pay each month for every different currency. Of course, I can decide each month to focus on one other currency (in addition to USD) and rotate between them, but I'm looking for a simpler solution.
If you only invest a few hundreds dollar every month, you may consider just pay interest for negative foreign currency balance (2.5% for many currency at IB), and only do conversion every several months.
guesto wrote: Thu Dec 24, 2020 12:47 am
daze wrote: Wed Dec 23, 2020 11:24 pm I suppose the article was written for US-based investors.
For NRA, it's another story.
I couldn't find info about that but something still doesn't add up for me.
Let's say for now that the US doesn't collect any additional taxes (which is something I'm still not convinced about), how much do you pay for the foreign withholding fee?
Is it computed based on the non-treaty rate, the US treaty rate, or your country's treaty rate? The third option doesn't make much sense in my opinion, and I think the second is most likely correct. If that's the case, then for example in the case of Taiwan that you mentioned, you might be paying 21% instead of 10% when holding directly, if your country has an appropriate tax treaty.
The withholding of ADRs probably is based on the non-treaty rate.
Depending on the treaty between your country and the issuer's country, some ADRs tax withholding is reclaimable or can be used as tax credit. You may want to do some research to determine if it can apply to you.

In the TSM case, however, I believe that Taiwan has no tax treaty with Costa Rica. And even if some country having tax treaty with Taiwan, it's not very easy to buy Taiwan equities directly as foreigner. You cannot buy 2330.TPE at Interactive Brokers, for example. The possible tax benefit probably do not worth the hassle if the investment amount is not very significant.

Edit:
By the way, for Taiwanese, dividend is either taxed 28% separately or taxed as regular income. Therefore, if someone is in 30% income tax bracket or above, buying TSM ADR is more tax efficient than buying 2330.TPE. For those in 20% bracket or slightly under it, while ADR is mildly tax inefficient, some may still buy TSM ADR for one reason or another.
Topic Author
guesto
Posts: 24
Joined: Fri Dec 18, 2020 11:23 am

Re: International investing using USD

Post by guesto »

glorat wrote: Thu Dec 24, 2020 3:44 am Good luck finding another option that will cost you less than $2. If the underlying is in a different currency, *somebody* is doing the conversion and they will probably charge more than IB for the added service of doing it for you.
The somebody that is doing the conversion should be doing it in bulks, they can make profit just by adding a currency spread of 0.2% to the normal stock price spread, which is a price I'm definitely willing to pay. I just want to pay in small percentages instead of a flat minimum fee.
daze wrote: Thu Dec 24, 2020 3:53 am If you only invest a few hundreds dollar every month, you may consider just pay interest for negative foreign currency balance (2.5% for many currency at IB), and only do conversion every several months.
That's a decent suggestion but I've decided beforehand that I'm not willing to pay more than 0.2% on currency conversion, and if I use this approach then I'm paying around 0.2% monthly, so if it takes me 3 months to convert, I'm paying around 0.2% total on lending + $0.66 per month per currency.
Honestly I don't like being calculated about amounts that are so small, but the thing is that I want to invest in around 9 different markets, so it adds up.
daze wrote: Thu Dec 24, 2020 3:53 am The withholding of ADRs probably is based on the non-treaty rate.
Depending on the treaty between your country and the issuer's country, some ADRs tax withholding is reclaimable or can be used as tax credit. You may want to do some research to determine if it can apply to you.
Why do you think that? I'd guess it is based on the treaty rate, though I understand it can create some tax manipulation problems, but these exist anyway so nothing new here.
What you're saying about reclaiming tax withholding is interesting, but honestly, unless your broker is doing that automatically for you, I don't think it's worth the trouble.
daze wrote: Thu Dec 24, 2020 3:53 am In the TSM case, however, I believe that Taiwan has no tax treaty with Costa Rica. And even if some country having tax treaty with Taiwan, it's not very easy to buy Taiwan equities directly as foreigner. You cannot buy 2330.TPE at Interactive Brokers, for example. The possible tax benefit probably do not worth the hassle if the investment amount is not very significant.

Edit:
By the way, for Taiwanese, dividend is either taxed 28% separately or taxed as regular income. Therefore, if someone is in 30% income tax bracket or above, buying TSM ADR is more tax efficient than buying 2330.TPE. For those in 20% bracket or slightly under it, while ADR is mildly tax inefficient, some may still buy TSM ADR for one reason or another.
I assumed that you can buy basically anything through IB so didn't know that. But anyway I'm going to invest only in large developed markets and I'm pretty sure IB covers all of them.

Also, in your example, you didn't take into account additional tax that Taiwan may be collecting from dividends received from US stocks (after the ADR dividends were already deduced by 21% originally). I don't know how much Taiwan collects on US dividends though, or if it does so at all.
daze
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Joined: Fri Mar 08, 2019 1:09 am

Re: International investing using USD

Post by daze »

guesto wrote: Thu Dec 24, 2020 7:32 am
daze wrote: Thu Dec 24, 2020 3:53 am The withholding of ADRs probably is based on the non-treaty rate.
Depending on the treaty between your country and the issuer's country, some ADRs tax withholding is reclaimable or can be used as tax credit. You may want to do some research to determine if it can apply to you.
Why do you think that? I'd guess it is based on the treaty rate, though I understand it can create some tax manipulation problems, but these exist anyway so nothing new here.
What you're saying about reclaiming tax withholding is interesting, but honestly, unless your broker is doing that automatically for you, I don't think it's worth the trouble.
According to some other people's experiences on TSM ADR, most brokers, including IB, have no desire to help client about ADRs taxation issue, and withhold at the maximum tax rate applicable. But if you really want to know for sure how it works, it probably won't hurt to give some ADRs a try with 1 share or 2.

I generally agree that reclaiming tax by yourself usually do not worthwhile. That's why I refrained from buying US-domiciled treasury ETF at Schwab. IB is more willing to handle tax problems for Non-resident alien.
guesto wrote: Thu Dec 24, 2020 7:32 am
daze wrote: Thu Dec 24, 2020 3:53 am In the TSM case, however, I believe that Taiwan has no tax treaty with Costa Rica. And even if some country having tax treaty with Taiwan, it's not very easy to buy Taiwan equities directly as foreigner. You cannot buy 2330.TPE at Interactive Brokers, for example. The possible tax benefit probably do not worth the hassle if the investment amount is not very significant.

Edit:
By the way, for Taiwanese, dividend is either taxed 28% separately or taxed as regular income. Therefore, if someone is in 30% income tax bracket or above, buying TSM ADR is more tax efficient than buying 2330.TPE. For those in 20% bracket or slightly under it, while ADR is mildly tax inefficient, some may still buy TSM ADR for one reason or another.
I assumed that you can buy basically anything through IB so didn't know that. But anyway I'm going to invest only in large developed markets and I'm pretty sure IB covers all of them.

Also, in your example, you didn't take into account additional tax that Taiwan may be collecting from dividends received from US stocks (after the ADR dividends were already deduced by 21% originally). I don't know how much Taiwan collects on US dividends though, or if it does so at all.
TSM is probably the only Taiwan company matter for foreign investors. It weights 0.7% in VT (Vanguard Total World Stock ETF) and is the 8th largest holding of VT. Still, not having it is not really a big deal and I'm just home biased.

Taiwanese are exempted from reporting foreign income if it's less than 1M TWD (about 35K USD), and foreign income is not taxed unless (foreign income + domestic income) >6.7M TWD ( about 238K USD).
Last edited by daze on Thu Dec 24, 2020 8:56 am, edited 1 time in total.
daze
Posts: 39
Joined: Fri Mar 08, 2019 1:09 am

Re: International investing using USD

Post by daze »

You may also consider to use IB's Tool to convert ADRs into their ordinary shares. There are about 80-something supported ADRs.

https://www.interactivebrokers.com/en/index.php?f=15260

edit:
While you may or may not want to buy the supported ADRs, it could be used as an Forex tool.
For example, if you buy some RDS.A ADR in USD, convert it into ordinary shares, then sell it, you actually convert your USD into GBP. The cost is the bid-ask spread, the transaction fees and the possible price volatility before you can sell it.
For USD/GBP conversion, this trick is probably more expensive then direct conversion. But for some currency, it might be the cheapest way for converting.
I think that IB also provides stock exchange conversion for some cross-listing equities.

edit2:
All conversions will be charged an IB commission of USD 500 plus a pass thru of external costs.
Not really useful for most people, then.
Topic Author
guesto
Posts: 24
Joined: Fri Dec 18, 2020 11:23 am

Re: International investing using USD

Post by guesto »

daze wrote: Thu Dec 24, 2020 8:54 am All conversions will be charged an IB commission of USD 500 plus a pass thru of external costs.
Not really useful for most people, then.
Yep :)

Well thank you for trying to help
Topic Author
guesto
Posts: 24
Joined: Fri Dec 18, 2020 11:23 am

Re: International investing using USD

Post by guesto »

daze wrote: Thu Dec 24, 2020 3:53 am If you only invest a few hundreds dollar every month, you may consider just pay interest for negative foreign currency balance (2.5% for many currency at IB), and only do conversion every several months.
I've decided to follow this suggestion. Thanks.
Topic Author
guesto
Posts: 24
Joined: Fri Dec 18, 2020 11:23 am

Re: International investing using USD

Post by guesto »

Eventually, I found it best to use ADRs.
There is no double taxation by the US government, though you usually (at least that's how it seemed to me) pay the highest tax rate instead of the appropriate treaty rate.
Also, when investing in stocks outside of the US directly, it seems you get charged the highest tax rate and need to ask for a tax refund (good luck with that), when just obtaining the relevant vouchers from your broker may very well cost you more than the difference in taxation.
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