Stick to emerging markets to protect your investment income from new withholding taxes!

With Finance Minister Pravin Gordhan's Budget Speech less than two weeks away, your mind is probably focused on how to save your investment portfolio from further taxes. But there's already a proposed new tax regime under discussion between SA and the US - the implications of which will affect your investment income if you have American investments. It's just another reason you should look to investing in emerging markets instead of developed countries like the US.

While tax changes for the retail investor in this month’s budget speech aren’t likely to be severe, there’s a proposed change that will definitely affect your investment income.

SARS and the US National Treasury are in talks about a new tax regime on investment income based on the existing double taxation agreement between the countries, says Moneyweb.

The National Treasury and SARS are in negotiations with its counterpart in the United States regarding its new Foreign Account Tax Compliance Act (FATCA).

Here’s how the new tax regime’s withholding tax will affect your US investment income

FATCA will affect South African banks, asset managers, private equity funds, long-term insurers and other participants in the financial sector.

Early next year, FATCA will impose a 30% withholding tax on all forms of investment income these foreign financial institutions earn directly or indirectly from US assets.

When the withholding tax was first discussed in 2011, there were concerns that FATCA would stop SA institutions from competing in a global market if they have to pay a 30% withholding tax penalty.

 “If we take into account our currency, we are already at a disadvantage as it is weak compared to the dollar. The withholding tax will put further strain on our returns,” said Nazrien Kader, head of taxation services for Deloitte Southern Africa in the Financial Mail.

Invest in emerging markets instead of developed countries

That’s a further reason to invest in emerging markets instead of the developed countries.

After all, 70% of the world’s growth over the next few years will come from emerging markets, writes Andani Thakhathi in Money Morning – and you won’t face 30% withholding tax on your investment income.

Tags: investment income, withholding tax, invest in emerging markets