Uncle Sam Is Watching: Dividend Withholding Tax
Recently, I blogged about my investment into oil-related companies, and Penn West distributed its Q4 2014 dividend of $0.14 CAD. I expected roughly $9.41 USD after deducting 30% witholding tax to be credited into my bank account on Monday (19th Jan), but instead I received $11.41 USD. How is this possible?
After making a query to Standard Chartered and dozens of Google search results later, I got the answer. Generally, US-based companies listed on the NYSE will have its dividends cut by 30% by a withholding agent for foreign investors before the dividend is passed down to the investor. However, Penn West is a Canadian company, and according to tax laws, for most companies, withholding tax is calculated based on the country of incorporation. Thus, my dividends were subject to Canadian tax laws, which stipulates that “dividends paid to non-residents of Canada are subject to Canadian withholding tax at a rate of 25%”. This is still pretty high, and doesn’t match the amount calculated by Standard Chartered. So, what else gives?
Well, the answer is pretty simple – Double Tax Agreements. As I am a resident of Singapore, the agreement which Singapore has signed with Canada states that “the tax so charged shall not
exceed 15 per cent of the gross amount of the dividends.” As Singapore doesn’t have any tax imposed on foreign-sourced dividends in general, I am entitled to have only 15% taxed by Canada, and Standard Chartered has to book-keep with Uncle Sam about this exception to their taxation laws, as Penn West is listed in the US. Therefore, the mystery of the 15% tax is resolved, and I do not have to report or claim for it, as Standard Chartered does it for me.
So in theory, one could invest in a non-supported market through a supported exchange with your broker – in this case, it would be Canada companies that are listed on the NYSE – if your broker does not have access to a market that you’re interested in. Do note that the above scenario applies for the case of stocks, and ETFs may be treated differently.