Taxes, Expatriation, Facebook and Singapore
Death taxes have driven millionaires from Pennsylvania which has an inheritance tax to states like Florida where there is no death tax. But that is small potatoes compared to what is happening to our country’s billionaires. Not only do taxes drive the wealthy to other states, they drive them to other countries.
Consider the case of Eduardo Saverin, co-founder of Facebook. Last September, he surrendered his U.S. Passport, shifting his citizenship from the United States to Singapore which has no capital gains tax. He doesn’t avoid capital gain tax completely. The IRS levies a Section 877A “exit tax” on assets at expatriation. It creates a legal fiction that you sold all your stock the day before giving up your citizenship and charges you the current capital gains tax that would have been due had that sale actually occurred. However, considering that gains after the September 2011 expatriation date will not be subject to U.S. income tax, Saverin will save hundreds of millions of dollars in taxes.
To expatriate, a U.S. citizen must file Form 8854 with the IRS certifying that he or she is in compliance with federal tax law. The form requires the disclosure of foreign assets and income. The soon-to-be-expatriate must also pay an exit tax of 15% of the appreciated value of all his or her property subject to a statutory exclusion of $600,000 adjusted for inflation. Most observers believe this all-time low rate of 15% will not last long and that this may be the last good chance to cash out for only 15%.
The taxpayer must obtain or already have a second citizenship before surrendering his or her U.S. passport at a U.S. embassy and filing Form 8854. Otherwise, the expatriate will be a “stateless” person, a man without a country.
By making this election eight months before Facebook goes public and five months before the initial public offering (IPO) was announced, Saverin was able to argue that the (hard to determine) fair market value on the day before expatriation was much lower than the (easy to determine) price on the day of the IPO.
Yes, his exit tax will be a big bill, 15% of about $3.8 billion. But all future appreciation will be tax-free (absent a change in Singapore law), and he has his whole lifetime to pay the exit tax or until he sells the assets, whichever comes first, with the interest rate being the current applicable federal rate. However, if he wants to defer payment, he must post security for the entire liability.
Why Singapore? According to Wikipedia, Singapore is a city-state composed of 63 islands just south of Malaysia and 85 miles north of the equator. Since its independence in the 60s, it has grown to be the fourth largest financial center after Tokyo, London and New York; the largest logistics hub worldwide; the highest per capita GDP in the world; and home to more U.S. dollar millionaire households per capita than any other country.
Singapore’s tax system taxes income at a progressive rate from 0% to a maximum of 20%, and there is no tax on capital gains.
Some commentators say this plan will cost rather than save money for Saverin. They point out that if he held his stock until death, the shares would get a step-up in basis to date of death value and there would never be a capital gains tax on that gain. It appears Saverin prefers a tax plan that does not require his death.
Both the income and estate and gift tax apply to worldwide income and worldwide assets. Federal estate tax rates are 35% now and, perhaps, will go higher. Even the 35% rate is much higher than the capital gains rates. Unless the estate tax is repealed completely, this argument fails.
Saverin has a long time to live providing he doesn’t dissipate his life in the third largest casino gambling center in the world. He has a lot of U.S. company in Singapore, and they all believe the capital gain rates will go up long before their stock fortune will go down. Even if the capital gains tax is ignored, income taxes in Singapore are pretty friendly. With all those billionaires moving in and no expensive social programs or fancy military to support, they can afford to be low.
Senators Chuck Shumer (D-NY) and Bob Casey (D-PA) have already filed legislation to try to prevent this type of move. Their bill would force anyone who “expatriates for a substantial tax purpose” to pay a mandatory 30% rate on future capital gains. The ex-citizens would also find it very difficult to re-enter the U.S. Good grief! Is the answer to folks leaving the country because of high taxes to raise taxes even higher?
Saverin is paying tax on what he has when he leaves. That is not tax evasion.