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Withholding taxes and notional portfolios

G

grahall

Member
Hi, I have two questions:

1) In chapter 19 one of the potential drawbacks of overseas investments is listed as withholding taxes - what does this practically mean and why is it a drawback? Is it something to do with double taxation agreements?

2) In chapter 24 there is a discussion of notional portfolios. Whilst I understand the concept I don't understand why you would want to do this. The starting point for using this method is calculating the total market value of the assets. Therefore you already need to have a valuation (arguably the most realistic one) on your assets before you start, so why would you then recalculate a value using the notional portfolio method. Surely this will simply introduce inaccuracies into your valuation and be a more "incorrect" value than if you used the market value?

Any help much appreciated.
 
"Withholding tax" is tax deducted at source from dividends or other income paid to non-residents of a country. The investor could then be liable for further tax in his or her own country. However, the adverse effect of this will be reduced where there is a double taxation agreement between the domestic tax authorities and the particular overseas country, as this means
that the domestic tax is reduced or even eliminated because of the overseas tax already paid.

The advantages (and disadvantages) of the notional portfolio method of valuing assets are listed in the Chapter 24 Summary. I reproduce them here for your information:

The key advantages of a notional portfolio valuation are:
  • speed of calculation
  • the valuation result is not influenced by tactical investment decisions
  • the investment strategy is not influenced by the valuation result
  • stability of the valuation result
  • consistency with the (discounted cashflow) method used to value the liabilities.

The key disadvantages of a notional portfolio valuation are:
  • lack of realism
  • difficulty in communicating why the assets are not valued using market values.
 
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