Pundits are wrong to accuse the Facebook co-founder of exploiting the system; the IRS stuck it to him good and hard
By W.W. | IOWA CITY
ACCORDING to the internet's hilarious headline writers, Eduardo Saverin, a Facebook co-founder, dis-"likes" America's tax rules and has "un-friended" the land of the free in order to dodge a potentially monumental tax bill after Facebook goes public. Mr Saverin is Brazilian by birth, but has been an American citizen since 1998. Last fall, he filed the papers to renounce his American citizenship. Considering how well Mr Saverin has done here, is this jake? Farhad Manjoo thinks that not only is Mr Saverin's extreme self-deportation unfair, "It's ungrateful and it's indecent. Saverin's decision to decamp the U.S. suggests he's got no idea how much America has helped him out." Ilyse Hogue of The Nation is incensed:
In making this decision, the Brazilian native did more than expose his blind disregard for all that his adopted country has done for him. He has made himself the poster child for the callous class of 1 percenters who are all too happy to use national resources to enrich themselves, and then skate, or cry foul, when asked to pay their fair share. The story evokes the image of the marauding aliens from the movie Independence Day, who come to Earth to take what they can get before moving on to another planet.
Wait a second! Did Eduardo Saverin plunder us? Are we now a desolate husk of a country, sucked dry by Eduardo Saverin's rapine? Well, no. Facebook created wealth. Mr Saverin is leaving having deployed his capital in a manner that made America better off than it was when he arrived. But will he escape without rendering unto Caesar what is Caesar's? Well, no. Both Mr Manjoo and Ms Hogue mumble in passing under their breath while coughing that Mr Saverin will have to pony up an "exit tax". So what's this woefully insufficient tribute come to, such that Mr Saverin may be so bitterly denounced for exploitation and despoilment? According to Danielle Kucera, Sanat Vallikappen and Christine Harper of Bloomberg:
Saverin won't escape all U.S. taxes. Americans who give up their citizenship owe what is effectively an exit tax on the capital gains from their stock holdings, even if they don't sell the shares, said Reuven S. Avi-Yonah, director of the international tax program at the University of Michigan's law school. For tax purposes, the IRS treats the stock as if it has been sold.
Got that? Mr Saverin's on the hook for the amount his capital-gains tax would have come to had he sold all his American stock holdings. Tim Worstall sketches it out on his napkin:
[T]he net effect of his citizenship renunciation on his immediate tax bill is to increase it, hugely. For it will, at minimum, start with the idea that he's just made a $3.5 billion or so profit (adjusted downwards for the difference between the private market value of Facebook last fall and the IPO price) on his Facebook stock which he got originally for minimal amounts of money. At the standard 15% long term capital gains rate that's near $500 million right there.
Half a billion dollars! That is not scot-free. Did the marauding aliens in "Independence Day" leave behind a half billion American dollars after having successfully invested in Earth? They did not! One wonders how many pounds of flesh Mr Manjoo and Ms Hogue think Mr Saverin owes for the privilege of having Uncle Sam's hooks out once and for all.
Mr Saverin is actually taking a bit of a gamble. This is a bet that his post-IPO shares will be worth more than his pre-IPO shares. There's a good chance that he's getting a discount relative to the prospective, immediately post-IPO valuation of his Facebook shares, due to the potential difficulty of offloading privately-held stock. But stocks go down as well as up. Should the value of his Facebook stock decline below the amount at which it has been valued for exit-tax purposes, Mr Saverin may end up having donated handsomely to the Treasury.
The press seemed to say [Mr Saverin] did it to avoid [taxes], he has to pay taxes. He had to pay huge taxes, hundreds of millions of dollars to give up his citizenship and if it [Facebook] hadn't gone public or if something had gone wrong with the IPO, he would have been in a real bind.
When you give up your American citizenship, it's not fair as far as I'm concerned, but the rules are that you have to pay everything, you have to pay taxes on everything you own and then you can leave. I mean no other country in the world does that, we've got our own Berlin Wall, it's very expensive to leave, to give up your citizenship.
