With the S&P 500 index breaking new highs, the US market offers investors unmatched growth opportunities.
However, especially for dividend-oriented investors, the cost of the US withholding tax is real.
And for Singaporeans used to filing personal income tax returns with IRAS, this withholding tax is not always evident, as it is deducted even before it reaches your brokerage accounts.
Although we can’t avoid it, we should still understand how it works to minimise the drag on our long-term returns.
What is the US Withholding Tax and How Does it Work?
If you are expecting US$100 in dividends from your US holdings, you would end up getting just US$70 in your brokerage account. This is because you just paid 30% of your dividends as a withholding tax to the US government.
This tax is designed to be collected at the source, where the custodian bank or broker acts as the withholding agent.
These agents “withhold” the appropriate amount to be sent to the Internal Revenue Service (IRS), the US federal agency that enforces tax compliance.
Investors only receive the remaining untaxed amount of dividends.
This arrangement effectively shifts the burden of tax collection to the financial intermediaries.
Without this “collect-at-source” mechanism, tax compliance becomes difficult to enforce once the funds are sent offshore.
Withholding Tax Applies Only to Selected Incomes
For Singaporean investors, a 30% withholding tax applies only to dividends from equities, including the distributions from US-listed REITs.
Fortunately, interest earned from US bonds and free cash in a brokerage account are not subject to the withholding tax.
Capital gains from selling stocks at higher prices are also free from withholding taxes, unless the investor, as a “non-resident individual”, physically spends more than 183 days in the US in a single year.
Therefore, dividend stocks typically come with a comparably higher tax burden than growth stocks. This is something for investors to consider when managing their portfolio.
Form W-8BEN – What Does It Do?
The IRS knows whether an individual should be taxed through the W-8BEN form submitted by investors who are non-US residents.
Once their non-US status is verified, they are checked to see whether they are entitled to any benefits under existing tax treaties.
Unfortunately, Singapore does not have a tax treaty with the US, meaning Singaporeans are not entitled to a reduced withholding tax rate.
Still, Singapore investors in the US market must submit the form to avoid being labelled as uncertified, potentially incurring unnecessary taxes applicable only to US residents.
Form W-8BEN – What If It Expires?
Submission of this form is recurring – generally every three years.
Failure to renew means you lose any entitlement to any reduced tax rates.
Moreover, some brokers might even freeze your accounts’ trading privileges.
If extra taxes were incurred, can they be claimed back? Yes – but the paperwork could be a hassle.
The key takeaway is to avoid having it expire in the first place.
Irish-domiciled ETFs
Although some S&P 500 ETFs, such as the Vanguard S&P 500 ETF (NYSE Arca: VOO), are domiciled in the US, some ETFs, such as the iShares Core S&P 500 UCITS ETF (LSE: CSPX), have a similar holding profile but are domiciled in Ireland.
Despite being domiciled in Ireland, CSPX is listed on the London Stock Exchange – yes, the domiciliation of an ETF can be different from its place of listing.
Singaporean investors can take advantage of the CSPX’s lower withholding tax of 15% compared to the VOO’s 30%.
Moreover, CSPX is an accumulating fund, meaning dividends are automatically reinvested back into the fund’s net asset value, reducing the transaction costs of manual reinvestments.
Crucially, as Ireland-domiciled ETFs are not US-situs assets, they are also exempt from the US federal estate tax when one passes on.
However, these benefits are partially offset by CSPX’s typically higher expense ratio.
The following table describes an example of the long-term difference in returns of VOO against CSPX using an initial portfolio value of S$100,000, assuming a 7% annual return.
| Year | US-Domiciled – Vanguard S&P 500 ETF (30% Tax, 0.03% Fee) | Irish Domiciled – iShares Core S&P 500 UCITS ETF (15% Tax, 0.07% Fee) | Difference |
| 0 | S$100,000 | S$100,000 | S$0 |
| 1 | S$108,020 | S$108,205 | S$185 |
| 5 | S$147,069 | S$148,333 | S$1,264 |
| 10 | S$216,293 | S$220,026 | S$3,733 |
| 20 | S$467,825 | S$484,113 | S$16,288 |
Although the differences in withholding taxes and management fees do not result in a significant disparity in short-term returns, holding CSPX instead of VOO for two decades means one gets an additional S$16,288.
Get Smart: Avoid Unnecessary Tax Drag
The US withholding tax isn’t something that is within your control, but how you manage it certainly is.
Simple habits such as timely submissions of the necessary paperwork can save you enormous administrative friction.
An astute selection of tax-efficient ETFs can lead to savings that compound silently over decades.
Smart investors know better than to let their portfolio be eroded by inefficient tax drag.
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Disclosure: Larry L. does not own shares of any stocks mentioned.
