Facebook’s Saverin gives up his US passport over tax
14 May 2012
Posted by: SAIT Technical
Danielle Kucera and Christine Harper (Business Report/Bloomberg 14/05/2012)
EDUARDO Saverin, the billionaire co-founder of Facebook, has renounced his US citizenship before an initial public offering (IPO) that values the social network at as much as $96bn, a move that may reduce his tax bill.
The social networking service plans to raise as much as $11,8bn through the IPO, the biggest in history for an internet company. His stake is about 4%, according to the website whoownsfacebook.com. At the high end of the proposed market capitalisation, that stake would be worth about $3,84bn.
Mr Saverin's holdings are not listed in Facebook's regulatory filings.
Mr Saverin, 30, joins a growing number of people giving up US citizenship ahead of a possible increase in tax rates for top earners.
The Brazilian-born resident of Singapore is one of several people who helped Mark Zuckerberg start Facebook in a Harvard University dormitory and stand to reap billions of dollars after the world's largest social network's public offering.
"It's plainly lawful and at the same time profoundly ungrateful to the country that provided these opportunities for him," said Edward Kleinbard, a US tax law professor. "He benefited from his US education, the contacts he made at Harvard and, most importantly, the extraordinary openness and flexibility of our economy that encourages start-up ventures to flourish."
Mr Saverin's name is on a list of people who chose to renounce citizenship as of April 30, published by the Internal Revenue Service. He made the move "around September" last year, Tom Goodman, a spokesman for Mr Saverin, said.
"Eduardo recently found it more practical to become a resident of Singapore since he plans to live there for an indefinite period of time," Mr Goodman said. Mr Saverin still holds Brazilian citizenship.
Americans who give up their citizenship owe what is effectively an exit tax on the estimated capital gains from their stock holdings at the time of the renunciation, even if they do not sell the shares, said Reuven Avi-Yonah, director of the international tax programme at the University of Michigan's law school. That means, for tax purposes, the US's revenue service treats the stock as if it has been sold.
In Mr Saverin's case, the gain and subsequent tax bill would be based on the estimated fair market value as calculated by his tax advisers, not an actual open market sale. They could value his Facebook stake at less than it will be worth once the company's shares trade publicly.
Mr Saverin and his advisers could say that the value of his shares should be reduced for tax purposes because of the difficulty of selling them while the company was privately owned.
Renouncing citizenship well in advance of a public offering was "a very smart idea", Mr Avi-Yonah said. "Once it's public you can't fool around with the value."
And even the tax bill triggered by Mr Saverin dropping his citizenship can be deferred indefinitely until he actually sells the shares. In that case, Mr Saverin would have to pay interest during the deferral period — currently at an annual rate of 3,28% a year, Prof Kleinbard said.
Gains from any future appreciation of the stock will be earned free of any capital gains tax in the US and in Singapore. Singapore does not impose a capital gains tax.
While Mr Saverin helped start Facebook, he has not always had a harmonious relationship with Mr Zuckerberg. He scuffled with his Harvard University classmate over his ownership in Facebook. Mr Saverin sued him and settled for an undisclosed amount.
The 2010 movie The Social Network portrayed Mr Saverin as a scorned friend who provided the company's early financing and then got squeezed out.
Mr Saverin moved to the US in 1992, and became a citizen in 1998, his spokesman said. He invested in Asian, US and European companies and planned to invest in Brazilian and in other global companies which had strong interests in entering the Asian markets, Mr Goodman said.
Renouncing citizenship is an option chosen by increasing numbers of Americans. A record 1780 gave up their passports last year compared with 235 in 2008, records show. Income-tax rates for top earners will rise to 39,6% from 35% next year and rates on capital gains and dividends also are due to rise, unless Congress intervenes.
"It's a loss for the US to have many well-educated people who actually have a great deal of affection for America make that choice," said Richard Weisman, head of the global tax practice at Baker & McKenzie in Hong Kong. "The tax cost, complexity and the traps for the unwary are among the considerations."
Some of the world's largest wealth-management firms have ramped up efforts to fight tax evasion ahead of Washington's implementation of the Foreign Account Tax Compliance Act, known as Fatca, which seeks to prevent tax evasion by Americans with offshore accounts. HSBC Holdings, Deutsche Bank, Bank of Singapore and DBS Group Holdings all say they have turned away business.
The 2010 law, to be phased in from January next year, requires financial institutions based outside the US to report information about income and interest payments accrued to the accounts of US clients. That means additional compliance costs for banks and fewer investment options for all US citizens living abroad, which may depress banks' returns.
n Facebook plans to price its public offering of 337,4-million shares on Thursday at $28 to $35 each. They will be listed on the Nasdaq as FB. Morgan Stanley, JPMorgan Chase and Goldman Sachs are leading the sale.