Tax Realities

Posted on May 12, 2012 by

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Would you renounce your US Citizenship and “move” to Singapore to save 452 million dollars? See the following article by Julie Cohn from theDaily.com:

FACEBOOK STATUS: OUTTA HERE

Facebook co-founder Eduardo Saverin has “defriended” America and renounced his U.S. citizenship in a move that helps him dodge a possible tax bill climbing beyond a half-billion dollars.

Had he not ditched his passport back in September and remained a citizen, taxes from Saverin’s stake in the social network might have been $600 million or more in a future scenario under President Obama’s millionaire-targeting Buffett Rule.

The 30-year-old who helped Mark Zuckerberg create Facebook was born and raised in Brazil, moved to the U.S. in 1992, and became a citizen in 1998.

“Eduardo recently found it to be more practical to become a resident of Singapore,” said his spokeswoman, Sabrina Strauss, adding he plans to invest in companies in Asia.

News of his change in citizenship, first reported by Bloomberg yesterday, comes a week before Facebook plans to go public in one of the most anticipated IPOs in years, which will value the company at an estimated $96 billion.

Saverin shed his U.S. citizenship as proposals are afoot to boost capital gains tax rates significantly.

Still, it’s not like Saverin got away without having to put something into U.S. coffers.

Changes in the tax law passed in 2008 require Americans who renounce their citizenship to pay an “exit tax” on any unrealized gains in excess of $600,000. After that payment, once the person has left the country, additional gains are no longer taxable in the U.S.

In September when Saverin renounced his citizenship, Facebook was valued at $74.9 billion, according to SharesPost, a brokerage firm that tracks the valuations of private companies. Saverin’s stake in Facebook is reportedly between 2 and 4 percent. His spokesperson declined to confirm the number.

Assuming the 2 percent stake, when Saverin renounced his U.S. citizenship, he paid the government $220 million in capital gains taxes on his stake roughly valued at $1.5 billion.

But here’s where he comes out on top: Facebook is set to go public Friday at a valuation of up to $96 billion, which means Saverin’s stake has grown by more than $420 million in the eight months since he stopped being an American — gains on which he owes zero American taxes. Conveniently, his new residence is in Singapore, a city-state that doesn’t levy any capital gains taxes.

If Saverin had remained an American, he would owe $288 million in taxes if he sold his shares at the company’s initial public offering, or $68 million more than he paid in September. But the Bush tax cuts expire next year, and if capital gains tax rates go to 20 percent, at a minimum Saverin would have had to pay $384 million on his stake. Those numbers, of course, would be even higher if Facebook’s shares grow by even a dollar after its IPO.

Saverin’s Twitter account was barraged with outraged tweets yesterday, with some calling him a “traitor” who shouldn’t be able to return stateside. “Thank you @edsaverin for making me feel fine rooting for zuck in FB movie,” wrote one poster.

Others defended his actions.

“How do you fault a guy for taking advantage of a legal tax loophole that saves him $452 million? Hell for $452 million, most Americans would be ready to do more scandalous things than move to Singapore. Have you seen ‘Fear Factor’?” said one Silicon Valley consultant. “Like most of us, Americans may not agree the loophole should be there, but they would be idiots not to take advantage of it.”

In fact, U.S. tax law for Americans living abroad has become so onerous — even for non-wealthy expats — that 1,534 people renounced their citizenship in 2010, a tenfold increase from the 146 who did so in 2008, according to a December report by the National Taxpayer Advocate’s Office.

TAX MURDERER

In September, when Eduardo Saverin renounced his U.S. citizenship, Facebook was valued at $74.9 billion.

Saverin paid $220 million — the 15 percent capital gains tax — on his roughly $1.5 billion stake.

Next week Facebook is set to go public at a valuation as high as $96 billion. If Saverin had remained American, he would owe $288 million — the 15 percent capital gains tax — on his $1.9 billion stake, if he sold shares at the IPO. Savings: $68 million.

When the Bush tax cuts expire in a year, and if President Obama’s suggested 20 percent capital gains tax kicks in, Saverin would owe $384 million in taxes on that same stake. Savings: At least $164 million.

If the Buffett Rule that Obama has pushed for passes, then Saverin would owe $672 million in taxes on that stake at a 35 percent rate. Savings: At least $452 million.

No country for rich men
Other millionaires who have renounced U.S. citizenship to save on taxes

Eduardo Saverin is not alone. In the last 25 years, a number of millionaires and billionaires have renounced their U.S. citizenship and moved elsewhere, motivated by the possibility of paying fewer taxes.

Here are a few:

John Dorrance III — The billionaire heir to the Campbell’s soup throne renounced his citizenship in the mid-’90s, just before cashing in his stake in the business and moving to Ireland, where he still resides today.

Ted Arison — The late founder of Carnival Cruise Lines renounced his U.S. citizenship in 1990 and returned to his native Israel, but died in 1999, failing to meet the 10-year minimum period living abroad to reap the tax benefits he’d hoped for.

John Templeton — The businessman and high-profile philanthropist behind the Templeton Foundation was not so eager to give to the government, as it turns out. He renounced his citizenship in 1994, avoiding nearly $100 million in taxes.

Michael Dingman — The former director of Ford Motor Co. and Time Inc. renounced his citizenship in favor of the Bahamas, dodging some pesky taxes and ultimately being awarded a knighthood for his work with the Catholic Church.

Joseph Bogdanovich — The former chairman of the Pittsburgh-based H.J. Heinz Co., Bogdanovich renounced his citizenship in 1994 and moved to Britain.

Mark Harris Getty and Christopher Ronald Getty — The wealthy Getty brothers received Irish passports after making a large financial investment in the state, an arrangement that made it simple to renounce their citizenships for tax reasons in 1996.

Kenneth Dart — The Styrofoam cup heir renounced his citizenship and moved to Belize in 1994. When Belize later tried to open a consulate in Florida with Dart serving as consul, exempting him from U.S. taxes while living stateside, the State Department nixed the scheme.

– Julie.Cohn
@JCohn1

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