If a US company pays a dividend, you obviously have to pay tax on the
dividend (at CG rates). If an ADR pays a dividend do you have to pay
foreign tax or just US taxes?  If the foreign company underlying the
ADR paid a tax in that country, who would pay that tax and how would
it flow through to the investor in the ADR?  Just assume I have a
portfolio of $100,000 in various ADRs - as the dividends are received
is there any foreign tax due?

I assume with non ADR's (ordinary shares) you have to pay foreign
taxes.

I am not looking for any elaborate tax advice (obviously for this
amount of money), but just a general concept on taxes due on ADRs and
how that differs from Ordinary foreign shares.

Dividends from ADRs are indeed subject to U.S. taxes -- dividends from
ADRs also benefit from the new dividend-tax rules, with regards to the
new marginal rates.

As far as foreign taxes, in many (if not most) cases foreign taxes
will be withheld from the payment. You should not technically be
liable for both foreign and U.S. taxes, though arguing that point with
a foreign government is likely to be fruitless. However, you do have
some options for recouping that money:

* You can fill out Form 1116 and take the foreign tax credit. This
allows you a dollar-for-dollar credit for the withholding. You can
download the form from the IRS Web site at
http://www.irs.gov/pub/irs-pdf/f1116.pdf. The form is straightforward.

* You can claim the taxes paid as a deduction on your own income
taxes. This is easier and requires less paperwork, but of course is
not as good as a tax credit, as it will save you less money.

http://smartmoney.com/ask/index.cfm?story=19991108
http://www.liberty.co.za/liberty/index.asp?sCatID=investorrelations&sPageID=adrprogramme/adrprogramme.htm#How%20are%20ADR%20dividends%20paid
http://www.bnatax.com/tm/insights_newdividendtaxprovision.htm

V.


Search strategy:

Google search for

ADR dividend taxes foreign withheld
ADR dividend taxes

I am still a little confused about whether an ADR pays its foreign
taxes directly - since certainly the individual shareholder wouldn't
have to file a tax return with a foreign government. Also, still am
uncertain about whether a non-ADR foreign holding is US taxable, and
if so, is foreign tax also due.

Overall I am pleased with the explanation, since it didn't pay enough
for a thorough research.