What is the rationale for Revenue's tax treatment of ETFs?

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ClubMan

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Without going into all the details/nuances of the tax treatment...

If I invest in an Irish or EU domiciled ETF I am liable for DIRT @ 41% or income tax/PRSI/USC @ c. 52% on gains, possible deemed disposal every 8 years and no way to offset losses.

If I invest in a US domiciled ETF (admittedly denominated in US$ so there's an exchange rate fluctuation risk) gains are assessable for CGT @ 33%, I can offset losses, I get my annual CGT allowance of €1,270, there's no deemed disposal burden etc.

So what's the rationale for Revenue effectively discouraging people from investing in Irish/EU ETFs and pushing them towards US ETFs through the relatively penal tax treatment of the former?
 
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It is not DIRT.
DIRT is Deposit Interest Retention Tax and is charged on interest paid on deposit accounts.

ETFs are charged EXIT Tax

This was brought in to stop the insurance fund industry in Ireland offering funds which paid no tax until they actually paid out the funds. The delay/loss of tax receipts was considered substantial by the Revenue and they devised the EXIT tax regime to counter it.

The fund industry would not look on what you propose very nicely, as they are in competition with ETFs and would consider it unfair if they had to deduct Exit Tax and ETF holders did not.
 
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For an investor with a high marginal tax rate, an ETF that is subject to income tax/CGT won't necessarily produce a better after-tax return than an ETF that is subject to exit tax.

It depends on the respective contribution of dividends and capital gains to the total return over the holding period.
 
I would have assumed that most people invest in ETFs primarily for capital returns and that dividend returns subject to income tax would be marginal in the greater scheme of things?
Assuming that the main returns are capital returns and that returns will be similar then why would I invest in an Irish/EU ETF rather than a US ETF when the tax treatment of the former is penal relative to the tax treatment of the latter?
 
Because of the relative difficulty in purchasing non-EU ETFs - not everyone has or wants to open a brokerage account in the US - and I think some US brokers won't allow you.

While it is not illegal to sell you non-EU ETFs, there are restrictions on who can be offered such services

And, just to make my position, I think that the EXIT tax regime for ETFs is absolutely ridiculous and should be scrapped. An ETF is just another company the same as Eir or Kappa Smurfit and is not a fund as offered by the insurance industry
 
jpd said:
An ETF is just another company the same as Eir or Kappa Smurfit and is not a fund as offered by the insurance industry
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How about applying the exit tax regime to regular shares and US ETFs as well, to even the playing field? ;)

FWIW the Irish Savers Action Group is lobbying to have the rules for ETF taxation changed and have a UK ISA style system introduced if anybody is interested in supporting it - https://isag.ie/
 
OK - thanks.
No offence, but there's arguably an element of FUD factor in your post which I think should be dispelled.
Opening a US brokerage account is not difficult, there is no reason to even mention illegality, and being tax compliant is only as complex as it is normally (without a US based account).

I have had E-Trade accounts (individual brokerage and a couple of employer stock plan accounts for years and have had no problems.
In fact the stock plans even deal with many of the Irish tax issues/payments - e.g. income tax etc. on RSU grants etc.
The main issue that I had to date was the inability to transfer cash from my employer stock plan to my brokerage account but that's because of their own internal policies (so I just have to call them to do this as needed).
 
ClubMan said:
Anyway, my point is why on earth would I invest in an Irish or EU ETF when I can just go onto my E-Trade account and invest in a US ETF (e.g. SPY, VOO, IVV etc.) and thus opt for CGT?
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Are E-Trade just ignoring the PRIIPs regulations then?
 
zephyro said:
Are E-Trade just ignoring the PRIIPs regulations then?
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They aren't subject to PRIIPs regulations as they are in the US. You are investing in a different jurisdiction, so you are subject to their rules, not the EU's.


Steven
www.bluewaterfp.ie
Sarenco said:
For an investor with a high marginal tax rate, an ETF that is subject to income tax/CGT won't necessarily produce a better after-tax return than an ETF that is subject to exit tax.

It depends on the respective contribution of dividends and capital gains to the total return over the holding period.
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The dividend environment is pretty low at the moment, c. 2%. In these circumstances the tax on dividend is better than gross roll up.

Another issue with deemed disposal is that if you cash in after the fist deemed disposal is deducted or have to pay again at year 16, you have to add the amount paid in deemed disposal at year 8 to the fund value, calculate the tax due and then offset the deemed disposal already paid. You are paying tax on an amount that has already been deducted.

I actually wrote to the revenue a few weeks ago about this as it is time that Ireland got up to date with how the investment world works. I understand the rationale behind deemed disposal and gross roll up but there are plenty of other options that operate in the same way as dividend paying US domiciled ETFs but are still subject to 41% tax but the US version isn't? It doesn't make sense.


Steven
www.bluewaterfp.ie
 
SBarrett said:
They aren't subject to PRIIPs regulations as they are in the US. You are investing in a different jurisdiction, so you are subject to their rules, not the EU's.
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This is incorrect, PRIIPs applies to funds sold to EU retail investors regardless of the jurisdiction of fund or broker.
 
But a US broker just ignores that - there isn't any sanction because of that, is there?
 
The rationale is that in the absence of the rules, investors could buy accumulating ETFs, roll their investments up for ever, and never pay tax.

US ETFs have to distribute, hence Revenue’s concession on those and some others.
 
There is not at lot of utility to be got from having an accumulating ETF for ever - unless the point is to accumulate for accumulation's sake
 
Sarenco said:
What if the capital gain is low or negative over your holding period?
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I haven't run the numbers on that scenario. I might do it for one of my blogs over the next few weeks.

Gordon Gekko said:
The rationale is that in the absence of the rules, investors could buy accumulating ETFs, roll their investments up for ever, and never pay tax.

US ETFs have to distribute, hence Revenue’s concession on those and some others.
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You do get that impression sometimes alright.

There are distributing funds and ETF's though and the exit tax is still 41% on them. This doesn't make sense as to why US domiciled ETFs are subject to income tax and CGT and the European version that does the exact same is subject to a higher tax on gains.


Steven
www.bluewaterfp.ie
 
I was told that it’s because the legal structure can vary from State to State, and Revenue didn’t have the resources to look at them. Although I’m not sure I believe that narrative.
 
Looks like my question was moot after all since I don't seem to be able to buy the US domiciled S&P 500 index tracking ETFs that I was interested in (or maybe any US domiciled ETFs at all?). When I try to configure a buy order I get this:

Screenshot_20210303-163353~2.png
 
I've read this and other threads on similar subjects here. It seems to me that, from a taxation perspective, most people would be better off investing in a CGT vehicle that pays low or no dividends than an Exit Tax vehicle. But that's academic as it's difficult (impossible?) to do?

I can buy a basket of shares in companies that pay little or no dividends. But that doesn't give me the diversification I want and it gives me more work at tax return time, the more shares I put in the basket.

If I want to simply buy and hold something that tracks one of the big indices like MSCI World or S&P 500, it looks like I'm going to be nobbled by Exit Tax whether I buy an ETF or an index-tracking fund.

I've heard that Investment Trusts are subject to CGT. But are they as secure and as diversified as something like a Vanguard or Blackrock index-tracker? Can you get them denominated in Euro to avoid currency risk?

Am I going too far to suggest that the potential tax benefits of CGT over Exit Tax are something of a mirage for the average Irish investor who just wants to buy and hold a low-cost, Euro-denominated, well-diversified and secure investment vehicle?
 
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