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Author: OSUMAG Two stars, 250 posts Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 847  
Subject: Re: Embotelladora Andina ADR: AKO-A Date: 7/29/2010 8:03 PM
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Hello Jay155,

I would call a non-Roth IRA a traditional IRA or just an IRA.

See answers to your questions below in bold:

I just read that Chile withholds 35 % of all payments to foreign investors and that this can be recovered against US taxes if you own that equity in a taxable fund. Is that true? ___Yes, you would have to report the dividends from your taxable account as income in the U.S., but then you can receive a foreign tax credit on any foreign dividends withheld. However, foreign dividends received in your IRA would not be taxable in the U.S. but may be taxable in the foreign jurisdiction such as Chile. Any foreign taxes withheld from your dividends in your IRA would not be creditable against your U.S. taxes.__ Does the withholding apply to all moneys paid, including return of capital, capital gains, and dividends? _ Generally, just dividends. __ Are there similar problems or effects with the other non-US companies? __Yes, please read their annual reports and SEC Form 10-K or 20-F for general information or check out the U.S. tax treaties or just ask on the MF GG boards. Depending on the country and if there is a treaty with the U.S., some treaties have provisions that permit dividends paid to pension funds to be exempt from withholding tax (which by definition would include IRAs). You may have to check with your broker if you believe a company is withholding dividends when it should not due to this exemption___ As a general rule, should I avoid owning Chile and other non-US companies in a non-Roth IRA? ___Yes, at least in jurisdictions that have dividend withholding of 15% or more. For example, dividends from AKO-A would be withheld in Chile at 35%; then, once you take your distribution from your IRA, you will be taxed at your ordinary income rates. So, for example, if you receive $100 in dividends from AKO-A, $35 would go to Chile, then the remaining $65 would be taxed when you take a distribution from your IRA. Say your marginal tax rate is 35%, so, you would be taxed $22.75 in the U.S.. Therefore, you paid $57.75 in taxes on that $100 dividend or at a 57.75% tax rate. That is not good.

Finally, how do I minimize the damage from owning Chile companies in a non-Roth IRA? __ Well, good news is that you probably are up on your investments in Chile this year, so I would sell them. Since these investments are in your IRA, you would not recognize any capital gains tax.

Good luck!
Michael

P.S. Chile and the U.S. are close to ratifying an income tax treaty that will provide a maximum dividend withholding tax rate of 15% with dividends paid to pension funds exempt from withholding tax.
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