The GLOBAL* ETF from CoreShares recently paid dividends and some eagle-eyed investors noted that the foreign dividend tax rate was 30% whereas on a lot of other global ETFs the rate is 15%. The thinking was that the Double Taxation Agreement (DTA) between the USA and SARS locally kicks in and reduces the foreign dividend rate.

I reached out to Chris Rule from CoreShares asking about this and his response is below.

Thanks for bringing this to my attention, I think there is some confusion regarding the DTA.

The DTA between SA and USA simply means you are no liable to pay DWT again as the USA DWT rate is higher than the SA rate and we have a DTA in place.

I believe the confusion is coming from the Irish UCITS structure wherein the DWT is effectively reduced to 15%. It is in effect a Tax arbitrage.

Where possible we utilise this opportunity (take for example our S&P 500 which feeds into the Irish domiciled Vanguard S&P500 and not the USA one, here the fee difference is only 2bps)

In the case of the GLOBAL ETF we feed directly to the US Listed Vanguard VT fund at 0.08% as opposed to the cheapest Irish domiciled equivalent at approximately 0.32%. The rationale is that the tax benefit of going through an Irish UCITS structure does not compensate sufficiently for the fee difference (0.24% annually).

This makes sense and as a holder of the GLOBAL ETF, I’ll continue to hold. Sure it dents my dividends a little, but not markedly enough to make me want to switch.

Simon

* I hold ungeared positions.

At Just One Lap, we are big fans of passive investment using ETFs. In this weekly blog, we discuss ETFs on the local market and the factors you need to consider when choosing an ETF. If you have wondered how one ETF differs from another, this is where you can find out. We explain which index each ETF tracks, what type of portfolio could benefit from holding each ETF, and how the costs will affect your bottom line.