Best international broker for Philippine residents: Charles Schwab vs Interactive Brokers

For Philippine residents who want to venture into the international stock market, there are really just a few legitimate options available. For this matter, I don’t consider the likes of eToro and Abra as legitimate platforms for the serious investor or trader. The top three choices for Philippine residents are Charles Schwab, TD Ameritrade, and Interactive Brokers (IBKR). Since Charles Schwab is acquiring TD Ameritrade, I’m only covering Schwab and IBKR. So which one is better for Philippine residents?

(Note that if you’re a Philippine resident and also an American citizen, many of the issues raised here are not applicable to you.)

Before anything else, here are some related posts:

Now, as you can see from one of the above posts, I already have a Charles Schwab international account, so why I am I writing this article? Well, I’ll show that each brokerage firm has its advantages and disadvantages. Charles Schwab may work for me now, but may not necessarily be the best option for others.

Charles Schwab

One of the reasons I opened a Schwab account was to have a proper international account registered to my Philippine address where I can transfer my U.S.-based assets on my return to the Philippines. My previous accounts from Robinhood and Wealthfront, opened when I was working in the U.S., do not support my new status as non-resident alien. I also like the fact that Schwab gives out an ATM/debit card for easy and fee-free access to cash from ATMs in the Philippines and around the world. Just two months ago, Schwab became the first major broker to offer zero commission trading.

Interactive Brokers

In contrast to Schwab, IBKR is often said to be geared towards active traders and institutions. Its main account type is now branded as IBKR PRO. They started offering a zero-commission account recently called IBKR LITE but it is only available to U.S. residents. IBKR’s pricing structure, with fixed and tiered pricing, looks complicated because it is intended for active traders who can avail of lower fees depending on their trading volume. IBKR imposes an inactivity fee for accounts with balance less than $100,000.

Comparison

To simplify the comparison below, I used IBKR’s fixed pricing.

CHARLES SCHWAB
ONE INTERNATIONAL
INTERACTIVE BROKERS
IBKR PRO
Opening Balance$25,000$0
Inactivity Fee$0If balance < $100,000,
$10/month, can be reduced by commissions/activity
ATM/Debit CardYESOnly for U.S. residents
Commissions for U.S. stocks
and ETFs
$0$0.005/share
Minimum: $1; Maximum: 1% of trade value
Can be lower depending on volume in Tiered Pricing
Commissions for U.S. options$0.65/contract$1/contract
Can be lower depending on volume/option premium
Access to non-US markets?NOYES
Asia-Pacific (China, Japan, Australia, etc)
Europe (UK, Switzerland, Germany, etc)
North America (Canada, Mexico)
Example commissions for non-US marketsN/AUnited Kingdom:
GBP 6/trade for GBP-denominated equites
0.05% of trade value for USD denominated equities
Japan:
0.08% of trade value

Schwab wins with simplicity of zero commissions for regular investors

I’ve been enjoying zero-commission trading with my Robinhood account for both stocks and options. Nothing is really free though, as some say that you may not get the best execution price or speed with free commissions, so you get what you pay for. Zero commissions may seem ideal for regular investors, but it’s not really the main attraction for really active traders who still use IBKR in spite of it not being free. I’m not yet at that level of being concerned with the best execution price or speed so I’m fine with Schwab’s zero commission trading.

If you have less then $25,000 and trade a few times a month: IBKR

Clearly, IBKR is the only option in this case. If you do a few trades a month and generate $10 in commissions, then the $10 inactivity fee is irrelevant.

If you have $25,000 and want to trade U.S. stocks and not concerned about dividend taxes: Schwab

Schwab’s zero commission trading is best if you will actively buy and sell U.S. stocks for capital gains and not for their dividends. As I wrote in this post about U.S. tax issues, dividends earned by Philippine residents are taxed at a 25% rate by the U.S., while residents of other countries may enjoy a lower 15% dividend tax rate. If you’re not in it for the dividends, then that tax rate is irrelevant, so you might as well stick with Schwab.

If you want to invest in non-US markets: IBKR

Only IBKR provides global market access if you don’t want to limit yourself to the U.S.

If you are a buy-and-hold passive investor and/or want the lowest U.S. dividend taxes: IBKR

With IBKR, you have access to global markets like the London Stock Exchange where you can buy Irish-domiciled ETFs that are largely equivalent to U.S.-domiciled ones. The main advantage of Irish-domiciled ETFs is that you will be able to enjoy the 15% dividend tax rate that Ireland’s tax treaty with the U.S. allows instead of the 25% treaty rate for Philippine residents. The 10% savings in rate for a fund that gives a 2% annual dividend yield is roughly equivalent to additional 0.2% expense ratio. Furthermore, Ireland itself does not have any additional withholding tax for dividends to non-resident investors. You can read more about it here: How to pay lower US taxes on US investments as a non-resident alien from the Philippines

If you have more than $60,000 in assets to invest: IBKR

The Philippines does not have an estate tax treaty with the U.S. This means that only the first $60,000 of assets invested in U.S.-domiciled equities are exempt from high estate tax rates. You can shield your assets from the reach of the U.S. estate taxes by investing in Irish-domiciled funds available in the London Stock Exchange, which you can only access with IBKR.

If you don’t have $25,000 but want a Schwab-like account: TD Ameritrade

Before Schwab can complete its acquisition of TD Ameritrade, you may still be able to take advantage of TD Ameritrade’s zero initial balance requirement. TD also offers zero commissions and has no inactivity fee.

If you don’t have $100,000 but want a IBKR-like account: TradeStation International

An interesting thing about IBKR is that there are other brokers that run on the IBKR platform as an introducing broker or white-label broker. One such broker is TradeStation International. It has slightly higher fees compared to IBKR but it follows a similar pricing structure based on volume. Unlike IBKR, TradeStation International does not have an inactivity fee although it does vaguely warn that “we reserve the right to review inactive accounts on a regular basis, contact clients and take any appropriate action.

So which is the better of the two?

For me, there’s no clear cut winner. Access to global markets and tax-optimal Irish-domiciled funds is IBKR’s main advantage. If you’re an active (and profitable) trader, IBKR’s fees probably don’t matter that much. On the other hand, as an amateur/hobby trader, I like the simplicity of Schwab’s zero commissions.

What I will use:

I’m not a completely passive investor. I like to do some day and swing trading. I also like writing weekly call and put options. For this kind of activity, I will likely keep my Schwab account for zero commission trading. The convenience allowed by Schwab’s debit card for cash access is a big plus.

For my passive investments, I am planning to open either an IBKR or TradeStation International account in 2020 so I can avail of lower dividend taxes with Irish-domiciled funds. I may also play with active trading with IBKR, particularly if I don’t have the $100,000 to waive the inactivity fee.

7 thoughts on “Best international broker for Philippine residents: Charles Schwab vs Interactive Brokers

  1. Can you write about how to fill up the W-8BEN form I am required to submit to open a Schwab One International account? I am really confused about section 10 where I have to refer to the a particular part of the tax treaty between usa and ph.

    Its this part –>

    Special rates and conditions (if applicable—see instructions): The beneficial owner is claiming the provisions of Article and paragraph ______ of the treaty identified on line 9 above to claim a _______% rate of withholding on (specify type of income): ________

    Explain the additional conditions in the Article and paragraph the beneficial owner meets to be eligible for the rate of withholding: ______

    1. The treaty tax rates you want to avail of are: 25% for dividends and 15% for interest. In the US-Philippines tax treaty, the relevant provisions are Article 11(2) for the 25% dividend tax rate and Article 12(2) for the 15% dividend tax rate.

      For reference:
      Full text of US-Philippines treaty: https://www.irs.gov/pub/irs-trty/philip.pdf
      IRS table of treaty rates for different countries with relevant treaty article citation: https://www.irs.gov/pub/irs-utl/Tax_Treaty_Table_1_2019_Feb.pdf

      I believe there are no “additional conditions” required to meet these withholding rates so you can probably leave that last section blank.

      Hope this helps, good luck!

    1. I already closed my Wealthfront and Robinhood accounts since they do not really offer their services to non-residents.

  2. Hi, if I open an account in an international broker, do I need to include the profit in my income tax return? How many percentage? Can you please elaborate.

    Do you think it’s better to just subscribe to USD funds from PH local trust companies / banks to avoid complexity in tax and transfer of funds although they have management fees up to 2%!

    Thank you very much!

    1. Since there are no fixed final tax rates for foreign capital gains and dividends, I understand they are taxed at the same rate as ordinary income. Ordinary income is taxed according to graduated tax rates based on the income level. See the table in https://ambitiouspawn.com/how-are-foreign-capital-gains-taxed-in-the-philippines/

      Local banks that offer foreign equity funds do not clearly state the tax implications of investing in these funds. I don’t think these funds are paying any taxes on foreign capital gains. Some banks tell the investor to consult their tax lawyer on the tax implications. Many assume that these funds are just like local equity funds that are already net of taxes (since local stocks sales are already at at 0.6% and dividends are taxed at 10%), but I don’t think that is the case. I do think that many investors in these foreign equity funds don’t end up paying the right taxes. The BIR probably may just be ignoring this for now. Otherwise they would have issued a definitive ruling on this issue.

      If I am correct, gains from foreign equity funds offered by local banks are to be taxed the same way as foreign capital gains from your international broker. There are really no tax benefits for investing in such high-fee funds versus using an international broker.

  3. Really informative as I’ve just created an account with IBKR. What do you think is the most convenient way to get funds to my IBKR account?

Leave a Reply