Watch Out - New US Withholding Tax in 2023
Updated: Nov 22
For non-US investors who hold and trade US securities, an important tax change is coming your way. Your broker may already inform you about it. But in case you miss it, then please take note of this.
With effect from 1 Jan 2023, a new withholding tax from the US Internal Revenue Service (IRS) will come into force. Non-US persons or entities will incur a 10% withholding tax on the sales, trading, and transfer of US PTP (Publicly Traded Partnerships) securities.
What are Publicly Traded Partnerships (US PTP)?
We are not experts when it comes to taxes or business structures. The US, in particular, is well-known for having one of the world's most complex tax systems. But based on what we understand, PTPs are limited partnerships whose shares can be readily traded by the public through say an exchange. However, the more important thing is that quite a number of ETFs, especially those that trade commodities and futures are structured as PTPs.
What is the impact of this new withholding tax?
At this point in time, there are still some question marks. And navigating legal tax documents without the right expertise is like walking through a landmine. But what we do know is that a 10% withholding tax will be applied to the gross proceeds from sales of these securities. There are exceptions though, for example, if the PTP certifies that it is not engaged in a US trade or business.
In any case, this is my interpretation. If you sell $10,000 worth of shares of a US PTP, the entire $10,000 will be subject to a 10% withholding tax. So that means you will only get back $9,000. If you still can't see the impact, then think of it this way. You can make 10% on your US PTP trade and still realize a net loss after selling because of this withholding tax.
Due to the complexity and implications involved, some local brokers in Singapore will no longer offer these US PTPs for trading going forward. But if you already have existing positions, you can still sell them.
Will this tax still be levied if you incur a loss?
If that is still the case, then it will really be rubbing salt on an open wound. The current language, however, seems to suggest a no. But again, we cannot be sure when it comes to interpreting cryptic legal English (see below). The fact that we can't find anything on this written in simple English probably means everyone is waiting for someone else to tell them.
Under IRC section 1446(f), if the foreign partner has gain on the sale or exchange of a partnership interest, the purchaser/transferee of the partnership interest must withhold 10% of the amount realized on that sale or exchange, unless the transaction qualifies for a full or partial exception. Thus, the withholding generally is not based on income flowing through the partnership to the foreign partner.
Which ETFs are US PTPs?
This is another potential minefield. Because if you refer to lists from different brokers, you may find conflicting results. Some ETFs are listed as US PTPs in one broker, but not in another. And if you notice in all the broker announcements to date, they will explicitly state that the list is not exhaustive, subject to change without notice, and they will not be responsible for its accuracy, timeliness, completeness, etc. In short, they are not sure of it either. Simply put, they are not going to be held responsible for any actions you take. If the brokers can't figure it out, then as traders or investors, we are even more clueless.
You can find the affected US PTP Lists in the announcements these Brokers made:
What can we do?
The most conservative thing to do is just to simply liquidate all your US PTP holdings as long as even one broker lists it. And do that a couple of days before year-end because US stocks take 3 days to settle including the day you make the trade. After that, just wait and see. As with the implementation of any new complex policies, there will be adjustments along the way. It will be a big hit for these ETFs to do nothing and lose their foreign investors.
If you can find alternatives for your affected ETFs, then that is another viable approach. Most of these affected ETFs are commodities or volatility related. For pure commodity or volatility plays, you can consider switching to using futures. But please do your homework on whether it is even viable before you start as futures are leveraged derivative contracts.
Lastly, you can opt to continue with the ETFs you have been trading as long as they are not listed by your Broker. But do note that you will bear the full risk if the ETFs you are trading happen to be a US PTP and are not listed by them.
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