How To Choose An Exchange Traded Fund

Transcription

1 ETFs and Tax Paul Amery, Moderator Editor Yvonne Kunihira-Davidson, Panelist Director Burt, Staples & Maner LLP Nathan Hall, Panelist Partner KPMG Dan Draper, Panelist Global Head of ETFs Credit Suisse Asset Management

2 ETFs and Tax Yvonne Kunihira-Davidson, Panelist Director Burt, Staples & Maner LLP

3 US withholding tax regulatory regime change - considerations for ETF investors FATCA Overview FATCA treatment of ETFs and other Collective Investment Vehicles What does the future hold from a US withholding tax perspective?

4 FATCA Overview FATCA stands for the Foreign Account Tax Compliance Act which was incorporated into the HIRE Act that became law on March 18, The goal of FATCA is to require non-u.s. financial institutions and non-u.s. entities owned by U.S. persons to provide information to the IRS identifying U.S. persons invested in non-u.s. bank and securities accounts. The FATCA regime goes into force on January 1, FATCA s lever to achieve this goal is a NEW 30% withholding tax levied on withholdable payments made to non-participating foreign financial institutions ( FFIs ). Withholdable payments include all U.S. source income ( FDAP ) and gross proceeds from the sale or disposition of any property of a type that can produce interest or dividends from U.S. sources. 4

5 FATCA Overview FFIs Broad definition of FFIs that includes any non-u.s. entity that: Accepts deposits; Holds financial assets for the account of others; Engages primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest in such securities. FFI Examples: banks, securities brokers and dealers, hedge funds, collective and family investment vehicles, private equity funds, trusts and trust companies, etc. Rules apply to all FFIs in an affiliated group that is, to all more-than- 50% owned FFI affiliates and entities of an FFI worldwide regardless of whether they receive U.S. source amounts. FFIs can be exempt from 30% withholding if they meet certain criteria, or belong to a class of institutions deemed per se good.

6 ETF treatment under FATCA The FATCA statute excludes from the definition of a financial account a debt or equity interest in a fund which is regularly traded on an established securities market, e.g. ETFs. However, ETFs were not identified as belonging to a class of institutions which are deemed per se good and therefore exempt from 30% FATCA withholding. Consequently, at this time, it is envisaged that such entities will have to enter into an FFI Agreement and comply with certain obligations, including the requirement to impose withholding on passthru payments and to calculate their passthru payment percentage (to the extent they receive a passthru payment).

7 What does the future hold? Notice which was issued on April 8, 2011 expanded on the limited views offered in the previous Notice It states that Treasury/IRS are considering the circumstances under which CIVs regularly traded on an established securities market could be treated as deemed compliant, (thereby exempt from FATCA withholding). Consider the impact of FATCA on ETFs from the following perspectives: ETF Industry ETF providers ETF Investors

8 ETFs and Tax Nathan Hall, Panelist Partner KPMG

9 Tax Can Strike At Three Levels Investor level Investors Tax reporting: Austria, Belgium, Germany, Switzerland, UK, US, EU Some important distinctions: ETF versus ETC SICAV versus FCP Fund Fund level Synthetic versus Full Replication Residence of fund Net asset taxes and stamp duty Equity Debt Derivatives Investment level Withholding taxes and treaty access FATCA!

10 ETFs and Tax Dan Draper, Panelist Global Head of ETFs Credit Suisse Asset Management

11 ETFs and Tax: something to consider When choosing an ETF, investors often give first consideration to the size of the fund, its TER, turnover, and market spreads, while leaving tax as a secondary issue Tax has a reputation for being complex, and is generally perceived as having limited impact on returns This alternative perspective illustrates the attention that tax deserves Example 1* The MSCI EM Latin America rallied more than 75% between July 2009 and March 2011** A UK based private investor holding an ETF tracking this benchmark for the period would see the following results: - If the ETF holds Reporting Fund Status (RFS): a capital gains tax of 28% - i.e. net return of 54% - If the ETF does not have RFS: income tax as appropriate (e.g ~40%) e.g. net return of ~45% The 10% difference in return created by tax is higher than the combined differences caused by TER and tracking error UK domiciled private investor ETF tracking MSCI EM Latin America, w RFS Index level Gross return Net return Jul Apr % 54% ETF tracking MSCI EM Latin America, w/out RFS Index level Gross return Net return Jul Apr % 45% Difference on 100,000 GBP invested 9,045 GBP *Assuming that no dividends were paid by the underlying during the holding period. ** Source: Bloomberg

12 ETFs and Tax: something to consider Example 2 For the same benchmark, a French domiciled private investor would similarly see a large difference by selecting an ETF with P.E.A. (Plan d Epargne en Actions) status a tax exempt wrapper in France applicable to investments into European stocks as opposed to one without such status Assuming the investor is a private client, this would be taxed at 31.3% on capital gains France domiciled private investor ETF tracking MSCI EM Latin America, w PEA status Index level Gross return Net return Jul Apr % 75% The 23% tax differential in the net return of 2 ETFs tracking the same benchmark with the same quality is again much higher than the combined differences cause by TER and tracking error ETF tracking MSCI EM Latin America, w/out PEA status Index level Gross return Net return Jul Apr % 52% Difference on 100,000 EUR invested 23,593 Euro The tax regime applying to an ETF therefore has a major impact on clients net returns Credit Suisse always takes tax into consideration when designing how to replicate a benchmark What follows is an overview of some aspects an issuer takes into consideration on this theme

13 ETFs and Tax: the issuer perspective 1) Fund domicile with respect to investor domicile The investor s country of tax residence is significant in relation to the fund s country of incorporation - E.g. A European domiciled investor holding an Irish domiciled fund investing in US equities receives after taxation 85% of dividends. When holding a US domiciled fund investing in the same underlying, the investor is subject to an initial taxation of 30% (70% of dividends received*) An ETF issuer therefore needs to accurately define its target clients, in order to design products that suit their specific needs Local Equities (USA) Local Equities (USA) 85c Net dividend (15% withholding tax) 100c Gross dividend (no withholding tax) European listed ETF (Irish domiciled) US listed ETF (US domiciled) 85c Gross dividend (no withholding tax) 70c* Net dividend (up to 30% with tax) European investor European investor Possible further taxation then applying to investor s tax return level Source: CS ETFs, assuming 100c Gross dividend * 15c of this amount can be re-claimed, where applicable. This does however involve an operational burden and may imply a delay between submission and settlement of the claim.

14 ETFs and Tax: the issuer perspective 2) Fund domicile with respect to the country of incorporation of index benchmark constituents The country of incorporation of a fund (C1) is significant when tracking a given benchmark, on the basis of the domicile of the constituents (C2) and of the taxation treaties in place between C1 and C2 Domestic funds can sometimes receive 100% of dividends - E.g. When tracking the DAX index, a German domiciled fund is preferable to a Luxembourg equivalent Double taxation treaties differ from one country to another - US equity trackers domiciled in Ireland receive 85% of dividends, while US equity trackers domiciled in Luxembourg receive 70% For an ETF issuer, it is important to be able to launch ETFs advantageously for a given jurisdiction, or run multiple platforms in different countries, in order to be able to track different underlyings most efficiently Local Equities (MSCI Canada) 85c Net dividend (15% withholding tax) European listed ETF (Irish domiciled) 85c Gross dividend (no withholding tax) Non US-based investor Local Equities (MSCI Canada) Local Equities (MSCI Canada) 75c Net dividend (25% withholding tax) 75c Net dividend (25% withholding tax) US listed ETF (US domiciled) US listed ETF (US domiciled) 64c Net dividend (mid scenario at 15%, but up to 30% w. tax) 75c Gross dividend (no withholding tax) Non US-based investor US-based investor Possible further taxation then applying on investor s tax return level Source: CS ETFs, assuming 100c Gross dividend

15 ETFs and Tax: the issuer perspective Therefore: No perfect structure exists, but different products can be tax-optimised for different types of clients Investors should understand their own tax situation and then screen the ETF market to select the issuer that best matches their circumstances Overview of tax related themes discussed with our clients in different jurisdictions UK, Reporting Fund Status: where the share class has successfully held RFS (or UK Distributor Status) throughout the investor s entire ownership period, the capital gains tax rate (e.g. 28%) should apply as opposed to the income tax rate applying to non-rfs ETFs (e.g. 40%). All CS ETFs hold RFS France, P.E.A.: All swap-backed CS ETFs are P.E.A. compliant, holding in their substitute basket European blue chips Italy: UCITS III ETFs are taxed for retail investors at 12.5%. By comparison, money market funds are taxed for the same investors at 27%. Not so relevant at the moment, but worth another look when rates start to rise

16 Questions and themes from clients Germany, Black vs White funds(*): in Germany the taxation of foreign investment funds is based on a transparency principle, under which vehicles fall into one of three categories: - White funds: funds registered for public distribution and fulfilling certain publication requirements for tax purposes - Grey funds: non-registered funds with a tax representative and disclosure of all tax relevant data - Black funds: all other funds For white funds, taxation is similar to that of German domiciled funds (apart from the fact that investors cannot receive any German corporation and withholding tax credit). The difference between white and grey funds is that capital gains realised by a grey fund always represent full taxable income for corporate and non-corporate investors, irrespective of whether the fund is distributed or not. German corporate and non-corporate investors in black funds are taxed on an unfavourable lump-sum basis. (*) Source: Ernst & Young AG

17 Disclaimer Credit Suisse Exchange Traded Funds (CS ETFs) may not be suitable for all investors. Credit Suisse AG does not guarantee the performance of the shares or funds. The value of the investment involving exposure to foreign currencies can be affected by exchange rate movements. We remind you that the levels and bases of, and reliefs from, taxation can change. Affiliated companies of Credit Suisse AG may make markets in the securities mentioned in this document. Further, Credit Suisse AG and/or its affiliated companies and/or their employees from time to time may hold shares or holdings in the underlying shares of, or options on, any security included in this document and may as principal or agent buy or sell securities. Credit Suisse Securities (Europe) Limited and Credit Suisse Asset Management Limited (together CS ) who are authorised and regulated by the Financial Services Authority (25 The North Colonnade, Canary Wharf, London E14 5HS), have issued this document. CS ETF (IE) plc ( the Company ) is an open-ended investment company with variable capital having segregated liability between its funds organised under the laws of Ireland and authorised by the Financial Regulator. Most of the protections provided by the UK regulatory system do not apply to the operation of the Company, and compensation will not be available under the UK Financial Services Compensation Scheme on its default. The Company is a recognised scheme for the purposes of the Financial Services and Markets Act Important information is contained in the relevant prospectus, the simplified prospectus and other documents, which may be obtained free of charge from Credit Suisse Asset Management Funds AG, Zurich or by writing to Credit Suisse Asset Management Limited, ETF Business Development, One Cabot Square, London, E14 4QJ.This document has been compiled with great care and attention to accuracy, however this material is not the result of a substantive research or financial analysis and does not constitute investment research or a research recommendation. This material is provided for information purposes, is intended for your use only and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned. The information provided is not intended to provide a sufficient basis on which to make an investment decision. Information and opinions presented in this material have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of this material. The price and value of investments mentioned and any income that might accrue may fluctuate and may rise or fall. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to individual circumstances, or otherwise constitutes a personal recommendation to any specific investor. Any reference to past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any products mentioned in this document. Alternative investments, derivative or structured products are complex instruments, typically involve a high degree of risk and are intended for sale only to investors who are capable of understanding and assuming all the risks involved. Investments in emerging markets are speculative and considerably more volatile than investments in established markets. Risks include but are not necessarily limited to: political risks; economic risks; credit risks; currency risks; and market risks. Before entering into any transaction, investors should consider the suitability of the transaction to individual circumstances and objectives. CS recommends that investors independently assess, with a professional financial advisor, the specific financial risks as well as legal, regulatory, credit, tax and accounting consequences. The issuer of the securities referred to herein or a CS company may have acted upon the information and analysis contained in this publication before being made available to clients of CS. A CS company may, to the extent permitted by law, participate or invest in other financing transactions with the issuer of the securities referred to herein, perform services or solicit business from such issuers, and/or have a position or effect transactions in the securities or options thereof. NEITHER THIS DOCUMENT NOR ANY COPY THEREOF MAY BE SENT, TAKEN INTO OR DISTRIBUTED IN THE UNITED STATES OR TO ANY US PERSON. This material is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject CS and/or its subsidiaries or affiliates to any registration or licensing requirement within such jurisdiction. This document may not be reproduced either in whole or in part, without the written permission of CS. Copyright 2011 Credit Suisse Group and/or its affiliates. All rights reserved.

18 ETFs and Tax Paul Amery, Moderator Editor Yvonne Kunihira-Davidson, Panelist Director Burt, Staples & Maner LLP Nathan Hall, Panelist Partner KPMG Dan Draper, Panelist Global Head of ETFs Credit Suisse Asset Management