Given Singapore residents are not subject to capital gains tax, withholding tax on US assets is fairly substantial, and trading commissions are relatively low, would "dividend avoidance" be a reasonable action?
Say you wanted to buy-and-hold shares of a bond ETF listed in the US, perhaps BND.
OK, BND is a low cost index fund domiciled in the United States that invests in U.S. dollar denominated investment grade U.S. corporate bonds.
You purchase the shares as usual, but you also sell it at market close the day before each ex-div, and buy it back at market open the next day.
This way, assuming the price of BND drops by exactly the dividend payout, you'd be able to buy back more shares each time, effectively amounting to a gain of the full dividend amount, while avoiding the 30% withholding tax.
For BND, this would save you 30% of a 2.24% yield, a gain of 0.675%.
You forgot at least one important part. Practically everybody holding that fund also owes U.S. dividend tax, including U.S. persons. The top marginal federal tax rate on those dividends is 23.8% for U.S. persons, and many of them will also be subject to some additional state income tax. I'd conservatively figure a 20% average effective tax rate that your U.S. counterparts face.
Basic finance theory suggests, ceteris paribus, that BND's share price should indeed fall ex-dividend to compensate for the
net (after-tax) dividend payout, not the gross (pre-tax).
If you assume the average BND investor pays 20 cents of tax per dollar of dividend while you pay 30, then you might be able to squeeze out about 10% (not 30%) of that 2.24% annual gross dividend yield, or about 22 basis points per year. BND distributes dividends monthly, so you might be able to eke out 2 basis points per "recycle" trade, give or take.
Another reasonable assumption is that you're not the first person to dream up this idea. There could be some other international "tax recyclers" from low or zero tax jurisdictions pushing the share price down a bit extra just before the dividend and pushing it back up a bit more just after. If that's happening (probably, a tiny bit), it'll erode those ~2 basis points.
Another potential issue is that BND is a U.S. domiciled fund, so it's U.S. estate taxable. If that fact bothers you, you can buy more life insurance to pay the future U.S. estate tax. If applicable, you could factor the cost of that additional life insurance into your calculations.
If you're a reasonably "big whale" or bigger, there's another possible solution: buy a variety of U.S. bonds directly, if that's what you want to do. That's not as easy with U.S. corporate bonds because each issue is rather limited, but for U.S. Treasuries it's quite easy. As a non-U.S. person living in Singapore directly holding individual bonds there's no U.S. capital gains, dividends, interest, or estate tax. It's when the bonds get packaged up into funds that the dividend and estate taxes apply. (U.S. persons are different, of course, and I'm making some other basic assumptions that typically hold -- for example that the bonds are not "effectively connected," not associated with a U.S. trade or U.S. business of some kind.)
Yet another possible approach is to use derivatives to place your bet(s) -- the futures markets. Somebody who's more of an options expert than I am might be able to come up with a reasonable recipe to make a similar bet to a long position in BND.
tried a few times, nothing happened. I have deposited more than enough funds in the system already. Am i missing something here ?
