Just days before Facebook launched its IPO, Eduardo Saverin, one of the company’s co-founders, announced that he had renounced his dual U.S. citizenship and would be moving to Singapore permanently. Since the news broke, Saverin, who has been living in Singapore since 2009, has been battling claims that the move is part of a scheme which would help him avoid paying hefty post-IPO taxes.
According to a May 16th Bloomberg report, Saverin currently owns about 4 percent of Facebook, the company he co-founded with former Harvard classmate Mark Zuckerberg. He owns approximately 53 million shares of stock in the company, which is currently valued at nearly $1.7 billion based on market prices on 5/23/2012 market pricing. Using a range of estimates for projected Facebook share values, Bloomberg estimates that Saverin will save as much as $67 million in capital gains tax by dropping his U.S. citizenship. Saverin’s tax savings will continue to accumulate since any profit from future appreciation of his Facebook stock will be free of capital gains tax, which is not imposed in Singapore.
In his defense, Saverin claims that the move was motivated by a genuine desire to live and work exclusively in Singapore, rather than a need to minimize his tax liability. Saverin has also said that he initiated steps to renounce citizenship more than a year before the Facebook IPO was announced. In a statement provided to Forbes, Saverin said “It is unfortunate that my personal choice has led to a public debate, based not on the facts, but entirely on speculation and misinformation.” Saverin has also acknowledged that he will continue to pay any federal taxes that may be due on income he earned while still a U.S. citizen.
While Saverin will have to pay a substantial exit tax on the estimated capital gains from his stock holdings at the time of his renunciation, he may be able to defer paying this tax until he actually sells his shares. Some lawmakers, however, have argued that enforcing an exit tax against expatriates is not enough.
Following Saverin’s announcement, Senators Charles Schumer (D-N.Y.) and Bob Casey (D.-Pa.) introduced the Ex-PATRIOT Act, which is designed to target individuals who attempt to take advantage of tax loopholes by renouncing citizenship. The bill automatically presumes that any U.S. expatriate with a net worth of at least $2 million and an average income-tax bill of at least $148,000 over the last five years has renounced their citizenship specifically to avoid taxes. The legislation would require the imposition of a 30% capital gains tax and it would also ban former citizens from re-entering the country after dropping their citizenship.
While the Ex-PATRIOT Act has drawn its own share of criticism from those who say it would unfairly target individuals who renounce citizenship for non-tax reasons, it does highlight the issue of the growing number of Americans who are giving up citizenship to avoid tax pitfalls. According to the Internal Revenue Service, at least 1,788 Americans expatriated in 2011, which represent an eight-fold increase since 2008.
In addition to the debate over Saverin’s move, Facebook has also drawn criticism over reports that it plans to claim $16 billion in tax deductions, which would effectively zero out its tax liability for 2012. Federal tax law allows Facebook to deduct hundreds of millions of dollars worth of stock options issued to company executives. According to a May 18th CBS news report, the move would allow Facebook to collect a $500 million tax refund and potentially reduce its tax liability for years to come.
Reportedly, Saverin will be removed from the Forbes 400 list of wealthiest Americans. It’s expected that he will still be included in annual rankings of the world’s leading billionaires.