The Roadmap for Deemed Disposal

[Corola]

I'm assuming there will be no further reduction to the Exit Tax of 38% for Budget 2027 based on the lack of Deemed Disposal action in the Roadmap?

I think it's unlikely but not impossible. There was no real indication that the rate was going to be reduced before last year's Budget either until it happened.

 

[Duke of Marmalade]

I think it might be reduced to CGT + 2%. Easy to do, though it would have Revenue implications as there would be a rebate on previous Deemed Disposals.

 

[Fortune]

which would indicate a very significant decrease in value or perhaps the company is insolvent?

No, not necessarily. A company in the FTSE 100 could be replaced by a new entrant that has seen massive growth. The company being removed doesn't need to have fallen in value, never mind be in difficulties.

 

[Fortune]

think it might be reduced to CGT + 2%.

I would expect that to happen over the course of a few budgets, based on a vague recollection of something that was said previously. I have no idea why they're so afraid of just making the intended change instead of drawing things out.

 

[Corola]

You have something positive to announce in every Budget if you do it gradually.

 

[Wolframius]

You have something positive to announce in every Budget if you do it gradually.

Conversely, more opportunity for the opposition to beat the drum of "tax breaks for the rich".

 

[ashambles]

Share buybacks (can be seen as deemed dividends) are a clearer comparison to deemed disposal- one of the reasons companies buyback instead of dividends is to allow shareholders to avoid dividend tax.

Apple has bought almost 1T in its own shares over the Tim Cook era, and seemingly its share price would be 40% lower if they'd not done so - for Irish shareholders (with the highest dividend tax in the developed world) this is a good thing.

BH have bought back around 80B over the last 10 years.

Without wishing to give any ideas to Revenue/DoF a few other countries such as India do tax some buybacks as deemed dividends for domestic companies. But for now it's not aligned with how they treat funds.

 

[Greenbook]

No that is not passive tracking. The reason passive tracking can be delivered at such low costs is that by simply starting off with the correct balance by market cap it self adjusts as market caps change. The main housekeeping is around the bottom hem where stitches fray and have to be replaced.

My apologies for going on about this, but if a new passive tracker is set up (new ones are being set up the whole time), it'll just increase or decrease in value by itself as the companies it is tracking decline or increase in value. There will be few disposals or acquisitions of shares. The tracker distributes all dividends.

What is the tax avoidance in that scenario? Is it around the bottom hem as you say? Does that tax avoidance warrant a deemed disposal rule, a 38% (previously 41%) tax on an unrealised gain and no loss relief at all?

I fully see why Revenue need to do something with managed funds, non-distributing trackers, things like that. But with the distributing 100% passive tracker, where is the tax avoidance scheme?

 

[Duke of Marmalade]

The tracker distributes all dividends.

It appears that the vast majority of trackers (by definition passive) are Total Return i.e. that they reinvest their dividends in the same stocks. That is how Total Return indexes are mathematically constructed.
I guess having to pay dividends would be an expense which would increase their tracking error.
But you are right that a distributing fund would not amount to tax avoidance. If passive this statement is even more so. Active funds would be benefitting from not being taxed on sales.
So there should be no issue in treating distributing funds the same as ordinary shares.
But, as I say, the main attraction of ETFs would seem to be the passive non distributors.

 

[Corola]

Conversely, more opportunity for the opposition to beat the drum of "tax breaks for the rich".

It didn't get this sense last year when it went from 41% to 38%. DD/exit tax is so arcane for most people outside of personal finance forums that it seemed to pass without much comment.

 

[Corola]

There will be few disposals or acquisitions of shares

The link in this post shows companies leave and join quite frequently, there are multiple changes each quarter.

But to your broader point: no, distributing funds do not have strong logic to need deemed disposal. It's an anomaly.

 

[Djimi Traore]

I have confirmed that BH is subject to US Corporation Tax (c. 20% ) on received dividends and realised capital gains. So what point are you making?

@Brendan Burgess @Corola Apologies, I was completely misled by Djimi's post

My point is very simple if you stick to the topic of deemed disposal and the published roadmap rather than going on wild tangents about US corporation tax.

The point is that if I invest in an ETF I'm taxed every 8 years due to deemed disposal. We are told deemed disposal is to protect the exchequer against tax avoidance. This is noted in the roadmap. This suggests that they think it's unfair that I as an investor do not have to pay tax until I sell the ETF so they've created a system to avoid it.

At the very same time I can buy company shares e.g. Berkshire Hathaway that don't pay dividends and I am never forced to pay tax until I sell them at a gain. I can go decades without paying a cent in tax if I don't sell and that tax liability disappears if I die. It's a contradiction.

I very much doubt Irish Revenue give a fig about what tax Berkshire Hathaway are paying to the IRS and it's not relevant to this point.

 

[Greenbook]

But, as I say, the main attraction of ETFs would seem to be the passive non distributors.

I would think that a fair percentage of ETFs do distribute dividends. I wouldn't think a majority do, but I don't think that distributing ETFs are rare beasts.

Another question I have is this. If the non-distributing fund tracks EU income shares ie. companies that pay large dividends, I can certainly see why something must be done tax wise. The annual yield could be 6 or 7 percent.

Other non-distributing trackers are different. The Nasdaq yields something in the region of 1%. I would imagine, but perhaps I am wrong, that the tax avoidance created by reinvesting the NASDAQ dividends, would not be as big as with the income tracking fund. Is that correct?

 

[Duke of Marmalade]

I would think that a fair percentage of ETFs do distribute dividends. I wouldn't think a majority do, but I don't think that distributing ETFs are rare beasts.

You were discussing trackers aka passives. The vast majority of trackers/passives are non-distributors.

The Nasdaq yields something in the region of 1%. I would imagine, but perhaps I am wrong, that the tax avoidance created by reinvesting the NASDAQ dividends, would not be as big as with the income tracking fund. Is that correct?

Well yeah. And high dividend shares are a worse tax proposition than high growth shares. You are arguing for the Swedish style "wealth tax" that will apply to the SimonSaver which at first blush looks as tax neutral as is possible.

 

[Duke of Marmalade]

wild tangents about US corporation tax.

I interpreted your post as suggesting that BH was a tax avoidance vehicle for the individual i.e. that the individual can get the benefit of an accumulator ETF with BH shares. Clearly I misinterpreted your point.

Policymakers take the view that many folk would seek to avoid tax but that only the most cantankerous Irish citizen would seek ways to make sure that any taxation explicit or implicit that they do pay will not make its way to the Irish Exchequer.

 

[Greenbook]

Well yeah. And high dividend shares are a worse tax proposition than high growth shares. You are arguing for the Swedish style "wealth tax" that will apply to the SimonSaver which at first blush looks as tax neutral as is possible.

Not at all. If the reason for the DD is to prevent investors from avoiding tax by going for a non-distributing EFT, does that logic hold if the companies which comprise the particular tracker pay low dividends?

I'm not arguing for any tax treatment. I'm simply trying to find out three things:

1. Why and how Index Trackers (non-distributing and distributing) are tax avoidance vehicles.

2. How the rest of the world deals with these tax avoidance vehicles. I'm assuming DD also

3. If other countries use a DD as well to tackle the tax avoidance, why does the DD only put off Irish retail investors and not retail investors in other countries?

 

[Greenbook]

You were discussing trackers aka passives. The vast majority of trackers/passives are non-distributors.

AI estimates the split as 60/40 - no idea how correct is or whether it is looking at these worldwide or just the Irish domiciled ones. US funds, it seems, typically distribute, so perhaps non-distributing index trackers are more common in Europe. Both as I understand it US trackers are subject to the DD, 38% tax and no loss relief here.

For the distributing funds, I think a poster on here before said that UK non-distributing funds must tell their investors what the annual dividend was and the investor then pays tax themselves accordingly. That seems a more sensible way to deal with the tax avoidance, but presumably they have a DD as well?

 

[Duke of Marmalade]

How the rest of the world deals with these tax avoidance vehicles. I'm assuming DD also

They require accumulator ETFs to declare annually their underlying dividend income and investors will be taxed on that s income.

If other countries use a DD as well to tackle the tax avoidance, why does the DD only put off Irish retail investors and not retail investors in other countries?

DD is unique. It is not the concept that puts folks off it is the Exit Tax. It started at Standard rate + 3% and as an emergency measure it went to 41%. If it is reduced to CGT + 2% it is a reasonable proposition.

AI estimates the split as 60/40

You are not asking the right question. How many passive trackers are distributors. A distinct minority as distributing costs money and passive trackers need to work on very thin margins.

 

[Greenbook]

You are not asking the right question. How many passive trackers are distributors. A distinct minority as distributing costs money and passive trackers need to work on very thin margins.

I specifically asked AI specifically about Exchange Traded Funds, not Funds generally. It said 60/40, skewed by US distributing EFTs it seems
My understanding is that all Exchange Traded Funds are passive trackers which just match the Index.

Are some of the Exchange Traded Funds managed funds that try to beat the Index?

They require accumulator ETFs to declare annually their underlying dividend income and investors will be taxed on that s income.

DD is unique.

Really? Nobody else in the world uses a DD? It is unique to Ireland?

Everybody else just demands that the non-distributed dividends are taxed? And otherwise the EFT just grows away like shares do? Not doubting you and you obviously know far more about all this than I do, but are you sure of this?

 

[Duke of Marmalade]

We are seriously not quite off piste but in a deep gully of our own making.
In the US because of regulation most ETFs are distributing.
In Europe the vast majority of index tracking ETFs are accumulator. I presume that these are the ones of interest to Irish investors.

I said DD was unique, it is possible that the Faroe Islands or others may have it.
The international norm is to tax dividends, either deemed or distributed, annually as income and realised gains as capital.

We have DD because Life companies do not like the international norm. They like to insulate the investor from all tax compliance and they like the composite rate (if it was reasonable).