Revenue Rules on foreign ETFs

The Revenue Commissioners seem to be treating US domiciled ETFs as securities rather than offshore funds, even though this would appear to be in direct contradiction of their definition of an offshore fund (as including shares in OEICs). Thus they are treating income as dividends (subject to 42% less US DWT of 15%) and CGT at 20%. According to my calculations, in terms of total payable tax, this works out to be slightly more favourable to the taxpayer than the 20%/23% fund system since the CG allowance of 1270 is available, together with the possibility of offsetting capital losses.

Indeed since the taxation of US & EU foreign ETFs seems to be very confused (both for taxpayers and the Revenue), I would be very interested to hear whether other taxpayers have any experience of this. It is particularly important because if the Revenue change their minds (and they don't like putting anything in writing!) they can apply 40% income and CGT tax to offshore funds that have not been correctly reported on time in addition to interest and penalties.

Yes, the situation is not very clear. However, I am going on the presumption that the will treat as OEICs, which is how almost all of them are structured. In my case, I sold a European ETF in August and made a small profit (€470) which I have not treated as a gain for CGT but will include in my Income tax return next year as Sched D, case III ( Income not subject to Irish Income tax)

This is the position of the ISEQ ETF.

Onlyone
Would be interested to know where you got your information on the Revenue's treatment of ETFs. I had understood that the Irish rules on offshore funds were similar to those applying in the UK. Many ETFs pay dividends so if you intend to hold the ETF for the long term then the offshore rules would be more beneficial since the dividends would only be taxed at 23%.

Jpd
Can you calrify that you actually have a income tax liability @20% on your small profit.

Thanks

Thanks for the comments!
jpd
I would have thought that if you disposed of your ETFs they should be declared as either:
1) An offshore fund gain - taxable at 23% => Tax of 108
2) A securities disposal - taxable at 20% => Tax of 0 (due to 1270 exemption)
If you declare the gain from the disposal as ScheduleD income will you not have to pay at your marginal rate (e.g. if you're high-rate 42%+2%Health=206)?

Ron_H
My information is derived from a friend who submitted a return correctly (in my view) listing US ETF income as from an Offshore Fund - 20%. When queried as to the source, the taxpayer specified in writing and during telephone calls that it was derived from stocks in OEICs (i.e. ETFs). The Revenue responded with an assessment listing the income as Schedule D Int Income from Securities/Possessions. Thus it was taxed at 42% instead of 20%. This conclusion seems inaccurate to me from my reading of Revenue rules, however presumably it results in a 20% disposal rate.

I have looked again at my calculations as to the effect of the 42%/20% regime over the 20%/23% one and yes, I agree that the offshore rules would be more beneficial over the long term if the holder does not utilise his/her CGT exemption every year. In this case, over 30 years assuming a growth rate of 7%, constant taxes and a dividend rate of 1.8%: the offshore fund would seems to outperform by 8.2% when dividends are constantly reinvested. NOTE: I have ignored ETF expense ratios and applied 20%+2% tax+Health deductions for the offshore situation and 42%+2% for the securities ruling.

Yes I have a liability on my gain - at 23%, i think. It corresponds to the "exit tax" on on-shore gross roll-up funds ie all funds launched since 2001.

I believe that the change in off-shore funds taxation appeared in 2001 (I am living in Ireland since 2004 only) and was done to bring the taxation of EU-based funds in line with Irish-based funds under EU single-markets regulations. It was illegal to discriminate against foreign EU funds as was previously the case.

The same offshore funds rules are supposed to apply to funds domiciled in the EU and in any OECD country.

Yes, I agree that the same rules are SUPPOSED to apply to both OECD and EU funds. However, on further reading of the web, I came to the following conclusions:

1) Most (if not all) ETFs on offer within the EU are offered within the UCITS framework and thus are liable to the offshore rules (even though some of them including ishares are resident and domiciled in Ireland - they seem to be a special case due to their IFSC status). This is the same as the ISEQ ETF tax treatment.

2) Since US ETFs are subject to a US 15% dividend withholding tax, this means that the Revenue Commissioners only would receive 7% tax under the terms of the Tax Treaty if the offshore rules were applied. This figure is arrived at by using the 20% relevant payment tax+2%Health-15%DWT. As this is too low, they seem to have decided to treat them as securities. This deduction is backed up by a cryptic statement in a PWC document:
"The tax treatment of ETFs for Irish resident investors is complex and depends on the withholding tax rates....".

NOTE: The above are merely my opinions and may be totally incorrect!

Popped into the revenue today to ask about how etf's are taxed and how i should go about filing my return...

they hadnt an iota when i mentioned the the term etf....the lady in enquiries rang her colleague for help, but he said etf's were taxed in the same way as ordinary shares!!!...even though he hadnt a clue what an etf was!!!!

no wonder people make mistakes in working out tax..when the revenue dont understand the rules themselves!

Have just received a e-mail from revenue on same subject/question - the person wanted to know what "EFT" and "UCITS" stood for!

Looks like the single market directives have forced changes way beyond the expertise available in the Revenue dept at the coal-face. The retail investors are probably few to date, but the revenue are way behind on this one.

hard to fathom!!