How to pay lower US taxes on US investments as a non-resident alien from the Philippines

I’ve discussed the important IRS tax issues when investing in the US as a non-resident alien from the Philippines in a previous post. I’ll repeat some of them here in discussing the known ways of lowering or avoiding altogether some of these US taxes.

Estate Taxes

If one has assets in the U.S. at the time of his/her death, the decedent’s estate will be subject to taxes by the U.S. government. A portion of the estate is typically exempt from this tax. For American citizens, this portion is worth $11.4 million. For non-resident aliens, only the first $60,000 is exempted by default, unless there is an estate tax treaty between the US and that alien’s country of residence. Unfortunately, for Philippine residents, there is no such estate tax treaty benefit. The following assets “situated” in the U.S. are subject to estate tax:

  • U.S. real estate,
  • All tangible property located in the United States,
  • Certain intangible property, such as U.S. marketable securities,
  • Debt obligations of a U.S. person [or the United States (including a State or any political subdivision)],
  • A U.S. trade or business, and bank accounts used in connection with a U.S. trade or business,

So if you are a Philippine resident with a U.S. brokerage account like Charles Schwab or TD Ameritrade, the following holdings in excess of $60,000 will be subject to estate tax:

  • U.S. stocks and U.S.-domiciled ETFs
  • cash in brokerage account

The estate tax rates on the amount in excess of $60,000 go up progressively and rapidly depending on the taxable amount:

RANGEMARGINAL RATE
$0 to $10K18%
$10K to $20K20%
$20K to $40K22%
$40K to $60K24%
$60K to $80K26%
$80K to $100K28%
$100K to $150K30%
$150K to $250K32%
$250K to $500K34%
$500K to $750K37%
$750K to $1M39%
>$1M40%

Needless to say, unless you love paying taxes even in the after-life, it is unwise to hold more than $60K in assets situated in the U.S.

Dividend Taxes

I’ve discussed in a previous post that the U.S. generally withholds 30% tax on dividends earned by non-resident aliens unless there is a lower tax treaty rate. For Philippine residents, that treaty rate is only marginally lower at 25%, while other residents of other countries enjoy as low as 15% dividend tax rate.

Fortunately, there is a way to enjoy another country’s lower tax rate even as a Philippine resident. The country of Ireland has a 15% dividend tax treaty rate with the U.S. There are so-called Irish-domiciled ETFs based in Ireland that are good alternatives to popular U.S. ETFs. U.S. stock dividends received by Irish-domiciled ETFs are only taxed at 15%. Any cash dividend distributed by the Irish-domiciled ETF to non-residents is no longer taxed. So a Philippine resident can invest in an Irish-domiciled ETF and enjoy the 15% lower dividend tax rate.

Another advantage of these Irish-domiciled ETFs is that they are not subject to U.S. estate tax since these funds are not situated in the U.S. I also read that Ireland itself does not have an estate transfer tax for non-resident investors.

Here are some popular U.S. ETFs with alternative Irish-domiciled ETFs:

Asset Class U.S.ETF Irish-domiciled ETF
S&P 500
SPDR SPY
iShares IVV
Vanguard VOO
SPDR SPX5
iShares CSPX
Vanguard VUSD
FTSE All-world
Developed and Emerging Markets
Vanguard VTVanguard VWRD
MSCI World
Developed
iShares URTH iShares SWDA 

Unfortunately, Irish-domiciled funds are not available from Charles Schwab, my current broker. I am looking into opening an account with either Interactive Brokers or Tradestation International, where these funds can be purchased.

Useful resources from Bogleheads

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