Dumping U.S. citizenship is a numbers game for some

Eduardo Savarin on Facebook

Facebook co-founder Eduardo Saverin, who is set to earn billions when the social networking giant goes public on the U.S. stock market Friday, has drawn criticism for renouncing his U.S. citizenship in a move that could save him millions in taxes. The Singapore resident still will end up paying fees, but experts say the benefits of expatriation for Saverin, and many others, may outweigh the costs.

Saverin’s stake in the company is estimated at nearly $4 billion. As a U.S. citizen, he would have been subject to a capital gains tax of about 15 percent, or $600 million.

By giving up his U.S. passport, he’ll avoid that fee, but that doesn’t mean he won’t pay any taxes in what will be the biggest initial public offering of an Internet company in history.

Saverin, and every other income earner who renounces U.S. citizenship, is subject to an exit tax on all of the assets he owned before expatriating. Just how much he’ll pay is up for debate, according to Michael Graetz, a tax professor at Columbia University in New York.

“The question is when his renunciation of citizenship is effective, and what was the value of that stock at that time. He renounced his citizenship in September, and so he’ll claim that the value was significantly less than the value of the stock on the open market because he had such a large block of stock that he couldn’t have sold it privately,” Graetz explained.

Saverin likely will battle out the valuation of his stock with the U.S. Internal Revenue Service. That court battle apparently is worth it to Saverin in the long-run. His spokesman, Tom Goodman, says the billionaire has found it more practical to become a resident of Singapore, which doesn’t have a capital gains tax.

Goodman said the move to Singapore was not to avoid taxes.

“He has invested in Asian, U.S. and European companies. He also plans to invest in Brazilian and global companies that have strong interests in entering the Asian markets. Accordingly, it made the most sense for him to use Singapore as a home base,” he said in a press statement.

The countries where those companies are based could charge some withholding taxes, but Saverin is not obligated to pay taxes to Singapore for income earned overseas. The Brazilian-born businessman won’t be paying taxes in his home country, either. The United States is the only major economy that taxes its citizens, wherever they are in the world, not just its residents — a practice that began to raise money during the American Civil War of the 19th century.

Saverin’s story, now made infamous by the Oscar-winning film “The Social Network,” is the stuff of American dreams. The son of a wealthy Brazilian businessman, he moved to the United States as a child to escape the threat of being kidnapped for ransom. Saverin became a U.S. citizen, and attended Harvard University, where he and Facebook co-founder Mark Zuckerberg hammered out plans for what would become the most popular social networking site in the world.

A falling out with Zuckerberg led to his removal from Facebook in 2005, which sparked a major legal battle that resulted in him owning about 4 percent of the company.

His decision to leave the United States has stirred ire from critics like tech blogger David Gewirtz, who slammed Saverin for how he played the system.

“Going so far as to renounce the incredible gift of citizenship we gave to this man, and by doing so, saved him from kidnap gangs in his native country, that’s below reprehensible,” he wrote on his blog, ZDNet Government. “Justice would be to take away his stock benefits if he renounces his citizenship. Justice would be to block him from raking in all that cash if he’s not willing to pay his fair share.”

Saverin’s move is not against the law. He is committing tax avoidance, not tax evasion, according to Reuven Avi-Yonah, the director of the University of Michigan’s International Tax Program.

“It’s clearly legal. Congress passed this law in 2008, that said that if you are a U.S. citizen living overseas, you are permitted to relinquish your citizenship and pay an exit tax,” he said.
Before there was an exit tax, Avi-Yonah says expatriates had a prolonged financial commitment to the U.S.

“You had to continue to pay taxes if you were a U.S. citizen for 10 years, unless you could prove to the United States that the reason you expatriated was not because of taxes. And low and behold, everybody was able to prove that they expatriated not because of taxes but for some other reason,” he said.

Avi-Yonah says before the law was passed, people felt it was unpatriotic to renounce, but now it’s just a matter of calculating the price.

“Congress put a price on it, and if the price is good enough, then you pay the price,” he said.

Saverin is among 1,780 people who renounced their U.S. citizenship in 2011, a massive jump from the 235 who expatriated in 2008, according to the U.S. Department of Treasury. Whether that number climbs, Avi-Yonah says, is not just a matter of money. Living in the U.S. is pretty desirable, he says, and even those who want to live outside the country still value a U.S. passport.

It’s a connection you can’t get online.

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