Latest news with #foreignInvestment
Globe and Mail
4 hours ago
- Business
- Globe and Mail
With Trump's budget bill looming, here's how U.S. foreign withholding tax works
Canadian investors may not be aware that when they earn income from a foreign investment, they may also be effectively paying a withholding tax to a foreign country. As countries cannot collect taxes from non-residents directly, most will hold back part of the income a foreign investor receives from a company incorporated in that country. 'It's just the simple way to make sure the government gets their tax,' says Karl Dennis, partner and national leader of the U.S. corporate tax team for KPMG in Canada. Now, a provision in U.S. tax legislation passed by the House of Representatives threatens to raise taxes on investors in Canada and in other countries that impose taxes, such as a digital services tax, that the U.S. deems unfair to U.S. corporations. Under section 899 of U.S. President Donald Trump's One Big Beautiful Bill, Canadians who hold U.S. securities or invest in U.S. companies through Canadian investment funds could see the rate of U.S. foreign withholding tax on dividends they receive rise significantly. At this point, cross-border tax experts have different interpretations of just how much the increase would be. Some understand the bill as increasing the rate of U.S. foreign withholding tax by a maximum of 20 percentage points, either to 35 per cent from the 15 per cent rate available under the Canada-U.S. tax treaty, or to 50 per cent from the 30 per cent statutory foreign withholding tax rate when a taxpayer is ineligible for the treaty rate. Others interpret the ceiling as 50 per cent, or a maximum of 20 percentage points above the statutory rate of 30 per cent, starting from the treaty rate of 15 per cent, where applicable. Tax experts say they're monitoring the progress of the bill and suggest the provision could be revised before its possible enactment. John Natale, head of tax, retirement and estate planning services, wealth, at Manulife Investment Management, says investors should speak with their financial advisors or tax advisors rather than sell U.S. investments solely because of the proposed legislation. 'Sometimes, people are eager or panic,' Mr. Natale says. Here's a brief overview of how U.S. withholding tax currently affects Canadian investors based on the types of investments and where those investments are held. (The tax implications for U.S. citizens who live in Canada aren't addressed in this article, as those investors would be treated differently.) Under the Canada-U.S. tax treaty, the U.S. imposes a withholding tax of 15 per cent on dividends paid from U.S. companies to Canadian investors, which is half the default rate of 30 per cent under U.S. tax law. To access the reduced treaty rate, a Canadian investor holding U.S. investments in a non-registered account needs to complete a U.S. W-8BEN form. The withholding tax applies to dividends but, in general, not to interest from bonds or savings accounts, or to capital gains realized on the sale of U.S. investments. (One exception is real estate: Canadians pay U.S. taxes on interest earned from U.S. rental property and on capital gains from selling U.S. real estate.) In a non-registered, taxable account, a Canadian investing directly in U.S. companies is subject to U.S. withholding tax on the dividends they receive. When a Canadian invests in a Canadian mutual fund or exchange-traded fund that invests in U.S. equities, the fund itself is the taxable entity in terms of U.S. withholding tax. The fund then distributes the foreign dividend income to the unitholder and reports the amount of foreign withholding tax. For example, a Canadian investor who is allocated $100 in U.S. dividends would receive $85, with the financial institution remitting $15 to the U.S. Internal Revenue Service. The financial institution would then issue a tax slip – either a T3 or a T5 – reporting $100 in foreign dividends and $15 of foreign tax paid. The investor would then report the $100 dividend on their income tax return and claim a foreign tax credit for $15. Under the proposed U.S. tax bill, the withholding rate would increase by five percentage points for every year the foreign country continues to charge an 'unfair' tax. (Cross-border experts have different interpretations on whether the increases would max out at 35 per cent or 50 per cent, where a treaty rate of 15 per cent is available.) Josée Baillargeon, director of taxation policy at the Securities and Investment Management Association, says it's unclear whether any additional taxes imposed under section 899 above the treaty rate would be eligible for a foreign tax credit or a deduction from income in Canada. 'We're currently seeking clarification on this matter from the Canada Revenue Agency,' Ms. Baillargeon said in a statement sent by e-mail. The U.S. doesn't recognize the tax-deferred status of Canadian registered plans that aren't retirement accounts, such as the tax-free savings account (TFSA), the registered education savings plan (RESP), the registered disability savings plan (RDSP) and the first-home savings account (FHSA). That means Canadians who invest in U.S. companies or hold Canadian mutual funds and ETFs that invest in U.S. equities held in TFSAs and RESPs are subject to U.S. foreign withholding tax on dividends, just as they would be if they held those investments in a taxable account. However, as these plans are tax-sheltered accounts in Canada, the Canadian investor doesn't receive a tax slip reporting the foreign dividends and foreign withholding tax, nor can they claim the foreign tax credit in Canada to offset the withholding tax. That means the 15 per cent U.S. withholding tax is a net cost to the investor that can't be recovered. The U.S. does recognize RRSPs, RRIFs, life income retirement accounts (LIRAs) and life income funds (LIFs) as retirement accounts and tax-deferred accounts. That means Canadians who invest in U.S. companies, or who hold ETFs listed on a U.S. exchange that invest in U.S. equities, are exempt from U.S. withholding tax on the dividends they receive. Adam Seliski, partner, international tax and transaction services with EY Canada, says it's unclear whether retirement accounts would continue to have access to their exempt status if section 899 were enacted. 'That's something we're monitoring very closely,' Mr. Seliski says. Even under current rules, the retirement account exemption isn't available for Canadian investors who hold Canadian mutual funds and ETFs that invest in U.S. equities. Canadian U.S. equity funds held in retirement accounts are subject to U.S. withholding tax, and investors don't have access to a foreign tax credit to offset, representing a drag on fund performance. While there may be an advantage to holding a U.S. investment directly in a registered retirement account in terms of avoiding U.S. foreign withholding tax, Canadian investors who own U.S. assets must also consider annual Canadian foreign reporting obligations, U.S. estate tax implications, and the cost of currency conversion.
Al Jazeera
21 hours ago
- Business
- Al Jazeera
What is the ‘revenge tax' in the US tax bill?
Tucked within the proposed 'Big Beautiful Bill', the more than 1,000-page tax and spending overhaul that United States President Donald Trump wants to see enacted in law, is a provision that is being referred to as a 'revenge tax'. The 'Enforcement of Remedies Against Unfair Foreign Taxes' in Section 899 targets countries that the Trump administration believes impose unfair or discriminatory taxes on US companies and individuals, and will allow the US to impose additional taxes on entities from those countries. The provision calls, for instance, for levies on revenue from digital services, such as data monetisation and online advertising. The proposal also includes a higher minimum tax on the profits of foreign entities, even if those profits are earned outside US borders. This could impact passive income streams, such as interest and dividends, and may discourage international investors from countries flagged as discriminatory. The administration's unpredictable approach to global economic policy has already created uncertainty in international markets. Should this measure be signed into law, it could further erode foreign investor confidence in the US market. 'This revenge tax move will add to economic uncertainty. It will stop foreign CEOs from investing – the very thing President Trump says he wants. It means more wild economic swings, stock market declines, less stability and a greater chance of recession this year,' Stuart Mackintosh, the executive director of the financial think tank Group of Thirty, told Al Jazeera. 'Every few days, we see a destabilising misuse of US power, more self-inflicted wounds, that look set to drive up prices and slow the economy. America has shredded its political and economic alliances. These revenge taxes underscore that America cannot be trusted.' Under the provision, certain foreign governments and international businesses could face an additional 20 percent tax, which would apply to non-US entities earning income from US sources, including interest, dividends and royalties. Taxes would be hiked gradually at the rate of 5 percent annually. It would also affect profits earned at US locations, which are transferred to foreign parent companies, as well as income from the sale of US real estate by designated 'bad actors'. Trusts, global foundations and partnerships with passive income could also be impacted. However, exceptions are built into the legislation for foreign pension funds and charitable organisations. The tax would only apply to countries designated as 'discriminatory' by the US Treasury Department. Countries not flagged would remain unaffected. House of Representatives Ways and Means Committee Chairman Jason Smith, a Republican from Missouri, said that while the provision could serve as an effective retaliatory tool, it 'will hopefully never take effect'. According to the nonpartisan Joint Committee on Taxation, the measure could bring in revenue of $116.3bn over the next decade. But it would also lower tax revenue in the long term, by $12.9bn in both 2033 and 2034. The administration's shifting trade strategies have already led to legal battles, policy reversals and a climate of unpredictability that has left companies hesitant to make long-term plans. Companies like toy manufacturer Mattel and automaker Stellantis have suspended financial guidance due to the volatile nature of US tariff policy. These policies have also contributed to swings in consumer confidence. When Trump announced his series of sweeping tariffs against trade partners on April 2, which he dubbed 'Liberation Day', confidence fell to a 13-year low, only to rebound after the administration paused the tariffs' implementation. Analysts warn that provisions like the 'revenge tax' could deter foreign investment and strain developing partnerships. 'If you've got the headwinds of an extra withholding tax that starts at an extra 5 percent [and] moves up to 20 percent over the subsequent four years, I think [investors would] have second thoughts. In terms of optimising your investment strategy, you'd have a slightly smaller allocation to the US,' Chris Turner, the global head of markets and regional head of research for the United Kingdom and Europe at ING, a financial services company, told Al Jazeera. There is already evidence that some economies have started diversifying away from the US. Canada, for example, has increased trade with Europe and Asia. Trump's trade policies have also been cited as a factor in foreign governments divesting from US treasuries, while the European Central Bank continues to promote the euro as a competing global reserve currency. This measure adds another mechanism to the Trump administration's broader trade strategy, which has relied heavily on tariffs even as many face legal scrutiny. Last week, the US Court of International Trade blocked the administration's blanket global tariffs enacted under the 1977 International Emergency Economic Powers Act. A federal district court temporarily halted the block's enforcement as legal battles unfold. Experts believe many of these tariffs may not withstand judicial review. 'There's no statute that provides the president that authority', to impose sweeping international tariffs through the International Emergency Economic Powers Act, Greg Shaffer, a law professor at Georgetown University, told Al Jazeera. 'And as the court said, if there were such a statute, it would be unconstitutional because the Constitution provides that responsibility to Congress.' However, the ruling did not address tariffs on aluminium, steel and automobiles, which fall under a different legal basis – the 1962 Trade Expansion Act. Under that statute, Trump recently announced plans to raise those tariffs to 50 percent for most imports.
Reuters
a day ago
- Business
- Reuters
Vietnam May exports rise 14% yr/yr, trade surplus at $4.67 bln
HANOI, June 4 (Reuters) - Vietnam's exports in May rose 14% from a year earlier, the government said on Wednesday. The country registered a trade surplus of $4.67 billion for the month, the government said in a statement. Firms in the Southeast Asian nation have been seeking to boost shipments ahead of the Trump administration's "reciprocal" tariff rate that would take place in July. Average consumer prices in the January-May period rose 3.21% from a year earlier, the government said, while industrial production rose 8.8% and retail sales were up 9.7%. Foreign investment inflows in the January-May period rose 7.9% to $8.9 billion, the government said. Foreign investment pledges in the period were up 51.1% to $18.4 billion.
CNA
a day ago
- Business
- CNA
Vietnam May exports rise 14% yr/yr, trade surplus at $4.67 billion
HANOI :Vietnam's exports in May rose 14 per cent from a year earlier, the government said on Wednesday. The country registered a trade surplus of $4.67 billion for the month, the government said in a statement. Firms in the Southeast Asian nation have been seeking to boost shipments ahead of the Trump administration's "reciprocal" tariff rate that would take place in July. Average consumer prices in the January-May period rose 3.21 per cent from a year earlier, the government said, while industrial production rose 8.8 per cent and retail sales were up 9.7 per cent. Foreign investment inflows in the January-May period rose 7.9 per cent to $8.9 billion, the government said. Foreign investment pledges in the period were up 51.1 per cent to $18.4 billion.
Bloomberg
2 days ago
- Business
- Bloomberg
Whose Idea Is Trump's Big, Absurd ‘Revenge' Tax?
An obscure item tucked deep inside President Donald Trump's big, beautiful tax and spending bill is spooking Wall Street. The question is how and why this idea came up in the first place. Section 899, titled 'Enforcement of Remedies Against Unfair Foreign Taxes,' gives the White House the power to levy a new tax of up to 20% on foreigners with US investments. It's nicknamed the 'revenge' tax, in that the administration would be able to to charge investors from countries that it believes unfairly tax American businesses.
