Comment by philipallstar
Comment by philipallstar 16 hours ago
> Not sure I get the reference here. Share buybacks are essentially a trick to avoid dividend tax, how is that related?
What does this mean? What's the trick?
Comment by philipallstar 16 hours ago
> Not sure I get the reference here. Share buybacks are essentially a trick to avoid dividend tax, how is that related?
What does this mean? What's the trick?
You can only realize the tax if the stock owners sell the stock (vs. giving them a dividend which triggers the tax on payment). It is more of a tax delay but since many people who bought these stocks have more money than they need, they no longer need to sell and they don't need the dividends much. So a buyback is just injecting that money back into their shares tax-free.
Yes, that's sort of what I thought must be happening. There's no "trick" involved. It's like saying salaries are a "trick" to avoid dividend tax. They'll still pay tax on it when they sell it.
> There's no "trick" involved
Well we can argue on the meaning of trick I guess.
Share buybacks are essentially a way to achieve the same effect as dividends, but in a non-obvious way, which has the benefit of avoiding taxation. That's a "trick" in my book, but I guess terminology doesn't matter that much.
> They'll still pay tax on it when they sell it.
Not but it's not _equivalent_. The tax paid on capital gains is not the same as the withholding tax. And paying tax _after_ compounding is not the same as paying it _before_.
Share buybacks are _effectively_ a trick to circumvent withholding tax for investors not willing to divest.
> which has the benefit of avoiding taxation. That's a "trick" in my book
But why? Minimising tax legally is...legal, and not a trick. That's all tax avoidance is.
> The tax paid on capital gains is not the same as the withholding tax.
That seems totally fine - if the rules are different then that's up to the people who write the rules. It's not a trick to choose to be paid via one method or another.
> But why? Minimising tax legally is...legal, and not a trick. That's all tax avoidance is.
I think we are lost in translation here. I am not a native English speaker, so there may be a subtle implication in "trick" that you see and I don't.
I meant "trick" as in "trick of the trade", a clever/crafty way of achieving something that may not be obvious for less experienced individuals.
Re-phrasing my original comment for clarity: "Share buybacks are just a technique to lower WH tax, why do you see this as anything related to round tripping as related in this article?".
> What does this mean? What's the trick?
The trick is essentially to buyback your own shares and destroy them. That effectively redistributes the value you bought to other shareholders, much like a dividend would.
How is that better you may ask? two reasons:
- Most investors prefer to accumulate rather than receiving cash. If you post dividends, they are immediately subject to withholding tax, so you get taxed before reinvesting.
- In a lot of cases, capital gains tax and withholding tax are different, the former being much lower than the latter. This is especially the case for funds with foreign UBOs, which incur 2x15% WH tax at the source.
- Buybacks are just more flexible, those that want cash can sell, those who prefer to accumulate are happy to stay, there's no real downside.