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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121144  
Subject: Re: Foreign tax on dividend Date: 6/26/2013 2:42 PM
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djlaino,

You wrote, I received a dividend on a foreign stock (VE) that had a 30% tax withholding imposed on it. I have done a little research and - as I understand it - it seems I cannot recover any part of this tax because the position is held in a tax-deferred IRA account. Can anyone confirm (or correct) my understanding of this situation? Should I just chalk this up to a lesson learned via ignorance of a rookie investor?

I can one-up this. I once bought ADR shares of TSMC (NYSE:TSM) in my rollover IRA. It was one of my first direct foreign investments. (I was also holding Total [NYSE:TOT] at the time and had recently experienced a dividend.]

Shortly after I purchased TSM, they announced a 5-for-4 stock split. In my experience, a stock split was a non-financial event. But apparently that's not true in Taiwan. The Taiwan government actually requires the shareholder to pay a 25% tax on the assessed value of the issued shares. The assessed value was not market value, but holy cr*p! What a surprise that was! The NAV of my TSM holdings didn't go up and I didn't received a cash payment, but the Taiwan government reached into my IRA account and took a chunk of cash out! WTF!

After that, I investigated the company more thoroughly. I had actually had some direct knowledge of TSMC as a manufacturer; but I really knew very little about the company's structure or really how profitable it was. I just knew they made good product, were well-run and they appeared to be swallowing all available contract semiconductor manufacturing business they could find.

Turns out the company is partly owned by the government of Taiwan. Part of the governing board are government appointees. What's more, the issuance of otherwise worthless stock splits appeared to be intentionally designed to generate tax revenue from "wealthy" shareholders and it seemed to correlate (given just a few data points) to times when the Taiwan government appeared to be struggling to balance its budget.

The scariest part of this is that my IRA was not a margin account. It was only coincidence that I had the cash on-hand to cover the taxes. What would the broker have done if I were fully invested?

I didn't want to learn. I sold both TOT (I'd also been hit by a 25% dividend tax on TOT, though it was on a cash dividend) and TSM on the next bump up. Now I'm very leery about buying an ADR in my retirement accounts. I do hold a few shares of VWO; but that's about it. Taxable accounts are another story ... though I'll probably never hold a Taiwan company again.

BTW, did you know that on ADRs the reported dividend yield does not exclude mandatory foreign taxes?

- Joel
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