Revenue E-Brief on ETFs

Marc said:

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.

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I really don't see what an ETF-by-ETF analysis would achieve - it' not like individual US ETFs have idiosyncratic features from a structural or regulatory perspective.

US ETFs are all open-ended investment companies or unit investment trusts registered with the SEC under the (US) Investment Companies Act, 1940 and are all subject to the supervision of the SEC at a federal level.

Will Revenue accept that an SEC-registered ETF that tracks a particular index is not similar in all material respects to an Irish-domiciled ETF, authorised by the Central Bank under the UCITS Regulations, that tracks precisely the same index?

Well, we used to know the answer to that question but I don't believe any competent tax adviser could offer a definitive opinion on the appropriate tax treatment going forward.

My own view is that the uncertain tax treatment means that US ETFs will no longer really be a viable holding for Irish-resident investors from the end of this year.

And you are welcome to your own anonymous, unregulated and uninsured view. Although for the avoidance of doubt for anyone reading it.

Its wrong.

Marc said:

And you are welcome to your own anonymous view. Although for the avoidance of doubt for anyone reading it.

Its wrong.

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Would you be good enough to explain why?

Sarenco said:

I really don't see what an ETF-by-ETF analysis would achieve - it' not like individual US ETFs have idiosyncratic features from a structural or regulatory perspective.

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That's also my thinking how can you differentiate between different etfs and say this one qualifies but this one doesn't. If you can prove that a specific us domiciled etf is not similar to an Irish fund then surely that applies to them all.
Surely the simple fact that these etfs along with many European domiciled ones are not gross roll up investments and you are paying tax on the dividends throughout means that they should not be included in the deemed disposal regime whatever revenue may say.
Has anyone ever challenged their reasoning ?

Revenue don't wan't people to either save - DIRT - or to invest. If you have money to invest left over after living costs, they consider it as a professional sleight, as it means they have messed up in not extracting enough.
The government wants you to consume and spend every single cent, apart from what they skim off.

Heard back from the Revenue and it is as vague as Marc has said.

With effect from 1 January 2022, investors must look at the product they invested in and decide for themselves whether it is to be taxed under the gross roll-up regime or general principles.

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To me, that is a ridiculous position to put investors in. There are distributing ETFs/ funds that are taxed under gross roll up too.

Where an intermediary has assisted an Irish taxpayer to invest in an offshore fund (that would include ETFs domiciled in the USA, EEA or certain OECD Member States where they are equivalent to an Irish ETF) have certain reporting obligations (refer to Paragraph 4 of TDM 27-02-01 https://www.revenue.ie/en/tax-profe...ains-tax-corporation-tax/part-27/27-02-01.pdf). This means that the intermediary must determine whether they are assisting an Irish taxpayer to invest in an ‘offshore fund’ or an investment that is taxed under general principles. Intermediaries should therefore be in a position to advise their Irish investors whether or not their offshore investment is being reported to Revenue as an offshore fund.

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PRIIPS has already put an end to intermediaries putting clients in non EU ETFs. the removal of previous guidance on US/ Canadian ETFs, means there is no way your typical advisor can put a client into one of these ETFs without specialist tax advice, which would be hard to get anyway.


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

Just to clarify

"PRIIPS has already put an end to intermediaries putting clients in non EU ETFs."

This isn't actually true. We and other intermediaries have invested millions in non-EU ETFs this year via discretionary investment managers who are not restricted by the PRIIPS regulations at all. It is up to intermediaries to educate themselves as to the options available to provide the best advice to their clients. Similarly if clients have not been made aware of all the options available to them they should consider getting a new adviser.


"means there is no way your typical advisor can put a client into one of these ETFs without specialist tax advice, which would be hard to get anyway."

Again, not true. We have obtained a specialist tax opinion which we are making available to intermediaries so that they can stand over the determination that a specific investment in a specific portfolio is taxed under general principles. Obviously we can't apply this opinion generally to products which have not been assessed. But it works perfectly for what we need.

Finally, while I'm on the subject I have also developed a robust solution to the problem of US Estate Taxes for securities held with our nominated custodian. This means that the risk is removed in respect of nominated investments (listed shares on the NYSE and US ETFs) held in the custodian account.

Theoretically existing positions can be transferred in-specie (i.e without selling and crystallizing a gain) and the US Estate Tax exposure dealt with.

It's not fully completed yet but we are a long way down the line and I just thought I'd mention it in passing.

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

Steven Barrett said:

Heard back from the Revenue and it is as vague as Marc has said.


To me, that is a ridiculous position to put investors in. There are distributing ETFs/ funds that are taxed under gross roll up too.

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As far as I am concerned I bought these etfs under the clear guidance that they were taxed liked shares under CGT, therefore they are still taxed like shares after January 1 because that was what they were when I bought them. On January 1 there is no clear guidance on where they fall because revenue has created this doubt.

There must be a reason why they are not definitive themselves is it because they are afraid of opening up the legitimacy of including distributing European domiciled etfs in the gross roll up regime?
Therefore they are creating this doubt to frighten the horses into crystallizing their etfs and shaking out some CGT.

Marc said:

Just to clarify

"PRIIPS has already put an end to intermediaries putting clients in non EU ETFs."

This isn't actually true. We and other intermediaries have invested millions in non-EU ETFs this year via discretionary investment managers who are not restricted by the PRIIPS regulations at all. It is up to intermediaries to educate themselves as to the options available to provide the best advice to their clients. Similarly if clients have not been made aware of all the options available to them they should consider getting a new adviser.


"means there is no way your typical advisor can put a client into one of these ETFs without specialist tax advice, which would be hard to get anyway."

Again, not true. We have obtained a specialist tax opinion which we are making available to intermediaries so that they can stand over the determination that a specific investment in a specific portfolio is taxed under general principles. Obviously we can't apply this opinion generally to products which have not been assessed. But it works perfectly for what we need.

Finally, while I'm on the subject I have also developed a robust solution to the problem of US Estate Taxes for securities held with our nominated custodian. This means that the risk is removed in respect of nominated investments (listed shares on the NYSE and US ETFs) held in the custodian account.

Theoretically existing positions can be transferred in-specie (i.e without selling and crystallizing a gain) and the US Estate Tax exposure dealt with.

It's not fully completed yet but we are a long way down the line and I just thought I'd mention it in passing.

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

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Marc

Pre PRIIPS, I could put a client directly into a US/ Canadian ETF through conexim. Post PRIIPS, I couldn't. I would have to use a DFM or the firm that you use, often at a much higher expense to the client for the client to avoid paying exit tax.

It's probably worth bearing in mind that gross roll up funds can actually be more tax effective than investments taxed under general tax principles, particularly for higher rate taxpayers (as Steven's analysis neatly demonstrates - https://www.bluewaterfp.ie/investments/which-is-better-gross-roll-up-or-cgt-investments/).

Sarenco said:

It's probably worth bearing in mind that gross roll up funds can actually be more tax effective than investments taxed under general tax principles, particularly for higher rate taxpayers (as Steven's analysis neatly demonstrates - https://www.bluewaterfp.ie/investments/which-is-better-gross-roll-up-or-cgt-investments/).

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I think the dividend rate is a bit high in that article. With tech stocks so dominate in most ETFs, I think a dividend rate of 2% is more realistic. I might re do my figures based on 2%*

Deemed disposal is the bug bear of investors. But then, if you have gross roll up, I think deemed disposal is perfectly fair. If you don't want to pay taxes for decades, there's always pension plans.

*always looking for content

There are a few projection in this article, using different assumptions re dividend rates and capital gains.

Although this sort of analysis is very sensitive to assumptions, it is also important to remember to include all the relevant facts.

For example a common omission I note in these articles is the failure to account for the DWT credit for directly held investments compared to a fund.




This point is expanded here


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

Steven Barrett said:

Marc

Pre PRIIPS, I could put a client directly into a US/ Canadian ETF through conexim. Post PRIIPS, I couldn't. I would have to use a DFM or the firm that you use, often at a much higher expense to the client for the client to avoid paying exit tax.

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Sorry Stephen I missed this comment

Post PRIIPs "the firm we use" IS Conexim as the DFM to purchase non-EU ETFs. The fund cost of a Global US ETF portfolio is approximately 0.08%pa. Conexim's custody charges are the same if you buy UCITs or ETFs. The additional charge for the service is less than the additional cost of many UCITS ETF.

Not sure where you are getting the "much higher cost" from

What is the reason for the revenue being so coy and vague with regard to the taxation of ETFs and other funds. For example what is stopping them from say introducing a simple rule that all investment funds whether Ucits , ETFs or investment trusts are subject to the 8 year deemed disposal tax.

Then if they did that then surely they would have to introduce it for normal shares and horror of horrors Property Investments. There must be something stopping them from being so prescriptive and clear and rigidly using Irish based collective funds as the benchmark for the deemed disposal tax ?

"With effect from 1 January 2022, investors must look at the product they invested in and decide for themselves whether it is to be taxed under the gross roll-up regime or general principles."

That's quite a statement. What clear, objective criteria does an "investor" have to decide this?

Personally speaking, I simply don't want to live with the ambiguity and risk that Revenue will take a different interpretation years from now as to how US based ETFs should have been taxed. I honestly don't see any other option to but to sell my small holding of US ETFs this year.

We now have written tax opinion confirming that we can deliver two options to investors looking to invest under general tax principles (income tax and capital gains tax) rather than exit tax also known as gross roll up.

I have updated our analysis here

Revenue pulls tax guidance on ETFs​

How are ETFs taxed in Ireland?
globalwealth.ie

OK, so after reading all of this, I think I’m going to need the following please:

How much is it going to cost me to get a personal tax advisor to keep me away from a fine?!!! I think I would rather pay out of my ETF gains when I hit 8 years rather than put myself through the pain of trying to work out what I owe.

The complexity placed on retail investors is ridiculous. Revenue should be tasked with making everyone’s lives easier, not harder!!

What is the reason for the vagueness of revenue with regard to US domiciled ETFs, why for example are they definitive on irish and european domiciled ETFs where there is no ambiguity. There must be something stopping them from being definitive with regard to US domiciled ETFs now.

What happens for example in the future where one revenue official decides that a certain US dom ETF is taxed under exit tax and deemed disposal but another official comes down on the other side that the same ETF is taxed under CGT with no deemed disposal. Surely this very scenario is going to play out unless they actually give clear rules for how they are taxed in the future?

Just wondering what other investors in these us domiciled etfs are doing now. My position is that I do not have enough information on where they fall. There is no advantage for me to sell them now as I don't have any loss relief to avail of anyway. If there is a big sell off in stocks next year I might use that as an opportunity to exit them and buy investment trusts or normal stocks instead.
There is such an information vacuum with regard to these etfs that I think it would be silly to take drastic action in the next month . Surely some accounting firm could provide bespoke taxation advice with regard to these investments over the next few years anyways