Where will I owe taxes on my US investments and how much?
[Note: This article is written from the perspective of Pakistanis investing in the US. If you are a US citizen, permanent resident, or tax resident, this article absolutely does not apply to you at all. It is also not a comprehensive guide, so while it provides some initial information, you should always consult a tax professional before making decisions about the tax consequences of your investments as your situation may differ from the one described here.]
The answer to that depends a bit on what your investment is, and what kinds of returns you make. There are two general principals to remember:
- Taxation in both Pakistan and the United States is on the basis of income, not assets. That means that the following two things are taxable
- Income you receive from an investment, such as rent on a house, dividends from a stock, or interest on a loan you give out
- Profits you make when you sell an investment for more than you bought it for
- Pakistan does not tax foreign income that has already been taxed.
What this means is that you cannot be taxed simply on the value of your assets, and you cannot be taxed if you make a loss on an investment.
With that said, for the investment products that Elphinstone offers, there is only one kind of investment income on which there is a tax on foreign nationals: dividend income, which is subject to a flat 30% tax.
We want to emphasise, however, that there is one dividend that is not taxable: the dividends paid out by the fixed income ETFs that are part of our recommended portfolios. Those are counted by US tax law as interest income, and are not taxable for non-residents of the United States.
Since Pakistan will tax any income the US does not tax, that means that any investment income you receive – aside from dividends from a stock – will be taxable in Pakistan.
For capital gains, the maximum tax rate a tax-filer will have to pay is 15% for investments held for less than one year. That rate goes down by 2.5% for every year that you held on to your investment, meaning it will go down to 12.5% after one year, 10% after two years, all the way down to 0% after six years.
Dividends and interest income are both taxable at a full and final rate of 15%. See details on relevant Pakistani tax laws from this website maintained by the accounting firm PricewaterhouseCoopers.
At present, Elphinstone does not deduct your Pakistan taxes for you, though we can provide you with a statement you will need to calculate your taxes and provide evidence to the Federal Board of Revenue.
[Disclaimer: This article is not tax advice that is applicable to any individual and is presented as information that may be helpful in tax planning. Please consult a tax professional before making any decisions that may impact your taxes.]
