When you open an online trading account in a U.S. brokerage account like Charles Schwab or TD Ameritrade, and you’re not an American citizen, you don’t have a green card, and you don’t live in the U.S., you’re generally classified as a non-resident alien by the Internal Revenue Service (IRS) of the U.S. Even as a non-resident alien, some or all of your income from your trading account may still be subject to taxes by the U.S.
With a U.S. brokerage account, you may receive the following types of income:
|Capital gains||gains from the sale of stocks/options/ETFs at a profit|
|Dividends||distributions from companies and ETFs|
|Interest||paid on uninvested cash; income from fixed income instruments like bonds|
The IRS does not tax your capital gains income if you were in the U.S. for less than 183 days during the tax year. Otherwise they are taxed at 30% or at a lower treaty rate if available.
The IRS generally classifies dividend and interest income as Fixed, Determinable, Annual, Periodical (FDAP) Income which are taxed at 30% or at lower treaty rate if available.
There are some exceptions to this classification, but in general, it applies to dividend and interest income received by ordinary non-resident aliens who don’t have a U.S. trade or business. For more details, please refer to the official IRS page on Fixed, Determinable, Annual, Periodical (FDAP) Income.
To avail of lower treaty rates, you are typically required to submit Form W-8BEN to your broker. The complete set of tax treaty tables are on the IRS site. The relevant table is the one titled Tax Rates on Income Other Than Personal Service Income Under Chapter 3, Internal Revenue Code, and Income Tax Treaties (Rev. Feb 2019).
The Cliff notes version of the effective tax withholding rates based on tax treaty benefits for Philippine residents is shown in this table:
|Type||Default Tax Rate||With US-Philippines Tax Treaty|
(<183 days in the U.S.)
|Dividends||30%||25% (Treaty Article 11(2))|
|Interest||30%||15% (Treaty Article 12(2))|
The taxes for dividend and interest income will be directly withheld by your broker. These taxes are considered final taxes. One cannot avail of the graduated tax rates for this income. Therefore, there is no need and no benefit to filing an income tax return like Form 1040NR to the IRS.
Finally, another potential tax issue that any non-resident alien investing in the U.S. must be aware of is estate taxes. Estates of a deceased resident of a country with no specific estate tax treaty benefit can, in general, only exempt the first $60,000 from taxes. Each additional dollar beyond $60,000 will be taxed based on a progressive rate table ranging from 18% to 40%. I’ll try to read up more on on this topic and write up another post if needed.
Now that we know how much the U.S. taxes your US investment income, the remaining question is how the Philippines taxes foreign source income including capital gains, dividends, and interest. The US tax laws have a lot of details to understand, but in the end, I find them quite straightforward. On the other hand, finding the applicable Philippine tax laws on foreign capital gains is next to impossible. I’ll write up my thoughts in a separate post.