Revenue E-Brief on ETFs

[Steven Barrett]

Does anyone know if there is a way to engage with Revenue to ask to explain their reasoning...

I have asked the revenue for clarification on their position. I only sent them the email yesterday, so don't expect a reply for a bit. I'll let you know what they say (which is probably that they don't give tax advice).



Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Gordon Gekko]

My understanding is that’s the issue…that the previous eBrief/guidance note veered too far into giving tax advice.

I also understand that the technical position hasn’t changed; US ETFs are not equivalent to unit trust structures and do not therefore fall under the 41%/25% fund tax regime.

Revenue have simply withdrawn their advice; they haven’t issued new advice which contradicts the previous advice.

It’s unhelpful though.

 

[Steven Barrett]

It would be good to have some clarification from the Revenue. If they were changing to 41%, there is no point in holding dividend distributing ETFs from 2022 onwards, so you'd need to sell them by year end and pay CGT on any gain. If you held them and paid CGT, they'll hit you with penalties.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Protocol]

I am sorry if this is a duplicate query, but I just want to clarify the tax treatment of three different types of savings vehicles.

(1) Managed funds, with an Irish broker and insurer, regular monthly amount or lump-sum

= Gross roll up tax-free, then 41% exit tax on deemed disposal at the 8th year

(2) Investment trust (are they all in the UK?) = treated as a normal share, with CGT on gains, and income tax on dividends

(3) ETFs = Gross roll up tax-free, then 41% exit tax on deemed disposal at the 8th year


So (1) and (3) have the exact same tax treatment, is that correct?

 

[Marc]

1) yes. But If an offshore fund such as a UCITs same rules apply except that tax is not deducted at source. However, not all offshore funds have this treatment and some in a “bad” jurisdiction have different treatment. It depends.

2) No. USA and non U.K. domiciled funds are also listed. Not all investment trusts are treated for CGT. It depends.

3) UCITs ETFs gross roll up yes. Other ETFs it depends

So 1 and 3 categorically do not have the same treatment automatically. It depends

 

[joe sod]

2) No. USA and non U.K. domiciled funds are also listed. Not all investment trusts are treated for CGT. It depends.

What does this mean, I thought that UK investment trusts and US closed end funds have similar structure , an "investment trust" is a "closed end fund" they are virtually all taxed under CGT rules as I understand it. What do you mean by "listed" ?

 

[Protocol]

3) UCITs ETFs gross roll up yes. Other ETFs it depends

So 1 and 3 categorically do not have the same treatment automatically. It depends

It's too complicated!!

I have been saving into this EFT:

iShares Core MSCI World UCITS ETF USD (Acc)

I am trying to understand the terms.

(1) World ETF - it buys shares in, or tracks the value of, a basket of worldwide shares - okay.

(2) UCITS means it is regulated within/by the EU? The ISIN of this fund starts with IE, so it seems to be managed in Ireland by BlackRock

(3) USD means the shares are denominated in USD - however, when I buy them on DeGiro, the price is in euro!!!!!????

(4) Acc - this means accumulating, meaning that any dividends paid by the underlying companies are used to buy more shares. This means the ETF will not pay out any dividends to me.

 

[jpd]

All correct

The shares are quoted in euros because the are being purchased on a euo based exchange
They are available on Euronext Amsterdam, Tradgegate, Milan and Xetra exchanges in euros, Swiss and LSE in $ and LSE in £
It doesn't really matter what currency you buy them in

Before purchase you should read the documents made available on the Degiro platform to inform yourself of what exactly you are buying

 

[Steven Barrett]

It's too complicated!!

I have been saving into this EFT:

iShares Core MSCI World UCITS ETF USD (Acc)

I am trying to understand the terms.

(1) World ETF - it buys shares in, or tracks the value of, a basket of worldwide shares - okay.

(2) UCITS means it is regulated within/by the EU? The ISIN of this fund starts with IE, so it seems to be managed in Ireland by BlackRock

(3) USD means the shares are denominated in USD - however, when I buy them on DeGiro, the price is in euro!!!!!????

(4) Acc - this means accumulating, meaning that any dividends paid by the underlying companies are used to buy more shares. This means the ETF will not pay out any dividends to me.

Irish domiciled ETFs have always been subject to tax of 41% on gains and deemed disposal. There has been no change to this.

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Steven Barrett]

1) yes. But If an offshore fund such as a UCITs same rules apply except that tax is not deducted at source. However, not all offshore funds have this treatment and some in a “bad” jurisdiction have different treatment. It depends.

2) No. USA and non U.K. domiciled funds are also listed. Not all investment trusts are treated for CGT. It depends.

3) UCITs ETFs gross roll up yes. Other ETFs it depends

So 1 and 3 categorically do not have the same treatment automatically. It depends

According to the Revenue eBrief, offshore funds are taxed at CGT of 40% and dividends are subject to income tax, USC & PRSI. You'd be better off in gross roll up.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[nodo]

Like many contributors to AAM , I have been worried by the possibility of US domiciled ETFs being brought into the Gross Rollup taxation method as used for UCITS ETfs . This seems now more likely on reading this forum. About 15% of my small portfolio is in US domiciled ETFs.
To shelter myself from this risk I have opened an eToro account and purchased through CFD , a small number of US domiciled ETFs . I am keeping far away from any leverage, or short selling. My reasoning is that this should allow me to continue to have dividends chargable as income tax , and ETF gains as CGT ( until Revenue decides to change its method of taxing CFD ! ).
I would be grateful to hear if contributors think this is a good idea for me , and should I increase my CFD holding , or am I just "flogging a dead horse".
Thanking you for any suggestions.

 

[Protocol]

I have been looking into this further, and it seems that "pound-cost averaging", or "dollar-cost averaging" does not work for ETFs?

As in, if a market falls, keep saving 250 pm into the ETF, acquire the same assets at cheaper prices, bring down your average cost.

It seems that the following is true?

"If you bought 1 share in an ETF for €100 in January and another share in the same ETF a year later for €200, then sold both shares the following year for €150 each. Under normal CGT rules you'd have no tax liability as the €50 gain on the first purchase would be offset by the €50 loss on the second. However for ETFs, the you'd pay income tax (41%) on the first €50 gain and there would be no credit given for the €50 loss as it is considered a separate transaction."

 

[Marc]

I have been looking into this further, and it seems that "pound-cost averaging", or "dollar-cost averaging" does not work for ETFs?

As in, if a market falls, keep saving 250 pm into the ETF, acquire the same assets at cheaper prices, bring down your average cost.

It seems that the following is true?

"If you bought 1 share in an ETF for €100 in January and another share in the same ETF a year later for €200, then sold both shares the following year for €150 each. Under normal CGT rules you'd have no tax liability as the €50 gain on the first purchase would be offset by the €50 loss on the second. However for ETFs, the you'd pay income tax (41%) on the first €50 gain and there would be no credit given for the €50 loss as it is considered a separate transaction."

I'll try and flesh this out a little.

If you buy UCITS mutual funds within the same "umbrella", so effectively on the same prospectus document, then you are fine for offsetting losses against gains.

Revenue argue that a UCITS ETF is a UCITs and therefore deem that gross roll up applies by virtue of the the fact that it is a UCITs.

If you can't offset losses on different purchases of the same ETF because these are being treated as separate "contracts" then it follows that they are not being taxed in the same way as a UCITs mutual fund. If that's the case then a UCITs ETF is not materially the same as an Irish fund and logically (not that logic has anything to do with this) then CGT should apply.

Revenue can't argue that a UCITS is a UCITS is a UCITS and apply gross roll up but then seek to apply a different tax treatment to individual purchases of a UCITS ETF than to a UCITs Mutual fund.

Seriously who would stand for this?

 

[RobFer]

That would only be true if you were to buy different ETFs from different providers. Funds within the same "umbrella" so effectively on the same prospectus document are fine for offsetting losses against gains.

What is considered a provider in this case? Are Ishares, Vanguard, DB trackers providers?

If I buy a UCIT ETF for 1000 Euro, eight years later it drops to 500 euro, then eight years later it grows to 900 euro, do I own 164 euro in tax?

 

[ryaner]

That would only be true if you were to buy different ETFs from different providers. Funds within the same "umbrella" so effectively on the same prospectus document are fine for offsetting losses against gains.

Have you ever gotten that in writing from the Revenue as they have specifically told people that the same ETF via the same broker should be counted separately for losses.
They've then of course also said they are treated as grouped when it comes to sales such that FIFO applies as they want all their cake.

 

[jpd]

If I buy a UCIT ETF for 1000 Euro, eight years later it drops to 500 euro, then eight years later it grows to 900 euro, do I own 164 euro in tax?

No
There is no tax on the deemed disposal after 8 years as there is no gain but a loss of 500 -1000 = 500 loss
There is no tax on the deemed disposal after a further 8 years ie after 16 years as there is still no gain but a loss of 900 - 1000 = 100 loss

 

[Protocol]

Another opinion on taxation of monthly savings of the same ETF:

ETF Alternatives

Apologies if similar thread has been created before. I have seen similar ideas skirted but never directly.

www.boards.ie

 

[joe sod]

If you assume that your US domiciled etfs are now offshore funds on January 1 when does the clock on deemed disposal start ?
for example if you bought the etf on say may 30 2014 surely the clock still starts on January 1 2022 and you still have until 2030 before you need to do a deemed disposal the same as if you bought the etf in 2022 when revenue changed their guidance.
It can't be the case that deemed disposals are triggered in January 2022 (for US domiciled etfs held for many years before under the CGT regime) just because revenue changed their guidance.

 

[ryaner]

Another opinion on taxation of monthly savings of the same ETF:

ETF Alternatives

Apologies if similar thread has been created before. I have seen similar ideas skirted but never directly.

www.boards.ie

That is a stock answer from Revenue and if that poster followed up and asked if that means they could sell Transaction 2 ahead of Transaction 1, since they are separate, the Revenue response will suddenly change to FIFO rules applying and that Transaction 1 was bought first, so needs to be sold first.

 

[Marc]

If I could just summarize a few important points

Contrary to some interpretations the latest Revenue e-brief has NOT made all non-EU ETFs gross roll up from next year

In fact, each investment must now, as was the case before, be looked at on its own merits and a determination made to establish the correct tax treatment for each investment. It is simply not possible to make a statement that all "x" or no "y" will be the case. It depends and THAT is what has changed in the Revenue guidance note.

Equally its not possible to state that the tax treatment of a particular investment, such as UK Investment Trusts, will be CGT, again it depends on the individual investment under consideration. Some are and some are not.

For the record we are obtaining specialist tax opinion for every investment our clients hold in their portfolios and we expect to be able to stand over the determination with Revenue. This, in my professional opinion, is the only sensible way to proceed in Ireland today. If you purchase an "offshore" investment you are required to file a self-assessment tax return. As set out in the Revenue E-brief you, or your intermediary, is expected to understand the correct tax treatment. After all, you bought it.

The fact that Revenue has made this process almost impossible for the lay-person to work out doesn't seem to bother them in the slightest.

I accept that the cost involved in getting to the "right" answer is beyond the scope of most private individuals and the additional restrictions caused by PRIIPS KIID documents means that many retail investors are frustrated that they simply can't purchase a low tax investment in Ireland today. I have some sympathy with that position and my extensive posts on here point to more than a little effort to try and point people in the right direction. But the fact remains that, in reality, DIY investing in Ireland isn't really practical for most people. Revenue have made it that way and that is philosophically at least, an unsustainable position.

"No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue." Lord Clyde

As taxpayers you should all petition your TDs to demand clarity under the Revenue's own Charter of Rights

The Charter declares as its priority objective the fostering of the highest degree of public confidence in the Revenue's 'integrity, efficiency and fairness', as well as declaring that the role of Revenue staff is to seek to collect ‘only the correct amount of tax or duty no more and no less.’

“The hardest thing in the world to understand is the Income Tax.” If these are your sentiments, you are in good company — the words are attributed to Albert Einstein.

Marc Westlake
Chartered Certified and European Financial Planner
www.globalwealth.ie