Senator proposes 30% anti-Eduardo-Saverin tax
bloomberg.com
bloomberg.com
But yeah, this seems like something that is both extremely rare and Not A Problem.
As Federal Income Tax, Capital Gains Tax, and Qualified Dividend Taxes increase, we will most likely see more of these flight-from-tax acts, not fewer.
George Soros is alive and kicking living in Upper East Side, Manhattan; Bedford, Westchester county; and East Hampton, Suffolk county. If you are lucky you can bump into him very often in Bloomberg Headquarter. And George Soros is also a proponent for Buffett Rules.
(I'm actually rather embarrassed to have made this mistake)
And, anyway, it seems like a more-or-less solved problem with the Exit Tax.
1) He talks about Eduardo like he knows him - really? Is there any way for him to know why Eduardo really did this (maybe he actually does like Signapore more than the USA).
2) He acts like he personally just got ripped off by Eduardo - I'm not sure laws are best created out of spite.
3) The arrogance that people outside the US have a terrible quality of life is incredibly disconcerting. It leads to a sort of insulated security that comes from telling ourselves we're so great and maintaing the status quo because it's easier instead of looking at other countries that are legitimately competing with us, learning from them and improving.
Note: I am not opining in this comment whether Eduardo should be taxed more than he already has been or already will be, I am merely stating the prevailing justification expressed for why people think he's a freeloader.
Morally...I think he's a freeloading bastard, and I look forward to the day he goes to jail in Singapore for violating one of their numerous and extremely punitive criminal laws. But I do not think he has a moral obligation to pay additional taxes if he has satisfied his legal obligations.
Morally, the United States is full of free loading bastards who know every single loophole in the tax laws. Why single out this one guy? Because it's much easier to focus on a single individual and crucify him? He's hasn't done anything different then what other "free loading bastards" have been doing for years.
This is guy is not a born US citizen in the first place and he's been living in Singapore since 2009.
Sure you might not like the guy, but when you're hoping bad things happen to him just because he's about to make a lot of money makes it look like you're awfully jealous of the guy.
It's also amusing that you denigrate Singapore for their "numerous and extremely punitive criminal laws" when the incarceration rate in Singapore is roughly a third of that in the US.
The primary argument is that Eduardo owes these taxes because the underlying income was earned while he was an American citizen/resident. It's not a matter of what he is doing right now--it's a matter of what he was doing back then.
Assuming technical compliance with the law, this argument is moot. The law requires payment of capital gains based on fair market value at the day of renouncing citizenship.
Saverin played by the rules: he legally became a US citizen. He got the related perks (access to education, quality of life, ...) and the related liabilities (The US tax code is onerous, and while it IS competitive with e.g. Europe on a percentage basis, you get much, much less for your taxes).
He is still playing by the rules: he is invoking the "I quit" card. Note that contrary to the media hype right now, he is making a bet: if Facebook loses value between his de-citizenship and the time he can sell (possibly 6 months after IPO, depending on how his stock was allocated and how the IPO is structured), he is going to LOSE money by denouncing his citizenship.
If he is not planning to live in the US, that's perfectly understandable - read about FBAR and FATCA. the tl;dr of those is: you have ridiculously onerous reporting requirements, FOREVER, with penalty 50% of your holding, PER YEAR (that is, if you're decided to be willingly noncompliant for two years, you have to pay your liquid worth; if you are for 4 years -- well, you owe twice as much; and by default you are assumed willingly noncompliant).
Now, whether or not his decision to move out of the US was driven by the US tax code or not, is (or at least, in my opinion, should be) immaterial. Furthermore, since he wants to live in Singapore, he is required to give up his US citizenship to receive a Singapore one.
I find support to this being a matter of spite, is that all proponents of this law that I have heard talk about punishing him and his ilk (in slightly different words).
Ted Arison and Michael Dingman did this in the early '90s and avoided billions in taxes (The wikipedia article claims Arison did pay taxes[citation needed], but I remember the headlines at the time said he didn't, and http://www.nytimes.com/1995/04/12/us/some-of-rich-find-a-pas... indicates that he probably didn't).
Saverin is actually taking a financial risk here, playing by the rules that were enacted, which are not letting him out easily.
It is exactly a matter of spite.
edit: minor rewording one minute after writing.
It's not an issue of objective technical compliance, since he has objectively complied with the rules. However, like all anti-abuse provisions of the tax code, there is a subjective element: Did Eduardo renounce his citizenship to avoid paying U.S. federal income taxes on the sale of his Facebook stock? If the answer is yes, there is a good probability that the IRS will pursue him for taxes arising from the IPO. (Note: in most situations, the primary intent must be to avoid taxes, but in some situations, any intent to avoid taxes is enough.)
Furthermore, he could be barred from this country ("excludable") under U.S. immigration laws.
The Senator has indicated that he believes the answer is yes. It's not a matter of spite; it's a mater of timing. Eduardo has been eligible for Singaporean citizenship for some time now, yet it was only when the Facebook IPO became likely (last fall) that he actually took steps to renounce his U.S. citizenship. (If you read other news sources, you will see the Senator refer to the timing issue.)
In the end, the only people who know what Eduardo's subjective purpose was in renouncing his citizenship are Eduardo and the advisors he consulted with in reaching this decision.
Furthermore, saverin is actually giving something up, whereas those corporates are paying 2-3% and giving up nothing.
As rprasad mentions, the laws are already on the books to deal with Saverin-like cases; the IRS has the tools to go after him, with no new laws needed. They were better equipped before 2008 (10 years after denouncing citizenship, capital gains still applied), but congress changed that to just an exit tax.
I see nothing wrong in what saverin is doing. I see everything wrong with what Schumer is doing.
There is nothing legally wrong with what Saverin is doing...depending on why he did it. As I have noted in other comments, there is a subjective element to the abuse provisions of the law. If that subjective element is deemed satisfied, then legally, he will be deemed to have donse something wrong. That determination is for a judge to make.
There was a small uproar. I was following (and still am). And yet, the tone was along the lines of "well, if we took away their ability to do that, they'd take their business somewhere else, so we shouldn't".
Did any senator or member of the house propose a "minimal 30% tax" on Apple or Microsoft or Google? did I miss that one too?
> Note that the corporations are effectively giving up something -- so long as they want to avoid U.S. taxes on their foreign cash, they cannot use that cash on any aspect of the U.S. business. It's not the same thing as citizenship, but cash is the lifeforce of business.
I stand corrected, they are giving up something. But it's something as small as "by paying 2% taxes instead of 30%, you give up the right to cut your own hair - you have to go to a barbershop".
e.g. Apple bought several companies in the last couple of years in Sweden (Polar Rose), Israel (Anobit), and the US. They paid for the first two with outside money, and for the last one with US money.
If all their money was repatriated....., it wouldn't have mattered to them at all.
Furthermore, they're all banking on a "tax free" or "low tax" repatriation day, for which they've been lobbying for a while; they got one 15 years ago. Corporates taking the long view can bank on that. People can't.
> That determination is for a judge to make.
Exactly. The relevant laws are already on the books. Schumer is just looking for votes.
Now he's choosing to become a citizen of another country and forfeiting those US citizenship benefits.
Just because you're a citizen, doesn't mean that country owns you – you still can choose to move, leave if you want to.
Saying he's a freeloader discounts basically everything Eduardo has done. I would say the net gain of Eduardo being in the US for the time he was, is significantly bigger than the net loss we'll feel from him leaving – making him the exact opposite of a freeloader.
Hatch's and Schumer's arguments reek of class warfare and exploit patriotism. It's all summarized in the quoted statement, "bothers me when somebody renounces his citizenship in the greatest country on Earth just to save money." It's more than just to save money, Mr. Hatch. The American colonies fought a revolutionary war over taxes, so it's much more than just "to save money."
The only person making any sense in the entire article is Charles Grassley. Saverin's decision should have been a signal to Congress that an overhaul of the tax code is needed, to make taxes more transparent and for real economic recovery. Instead, Schumer and Hatch have taken the opportunity to exploit class warfare and patriotism to grow an already unsustainable government even larger and more oppressive. Instead of looking at other countries legitimately competing with us (like Singapore) and learning from them, Schumer and Hatch are intent on making things worse in the US, and that's a damn shame.
1) Saverin doesn't live here any more. So why does Schumer care?? The guy already paid his exit taxes.
2) Saverin was never even originally a US citizen in the first place -- he's Brazilian.
3) "enforcing Schumer’s proposal might run up against the “perpetual problem of trying to figure out what’s in a person’s mind” when he or she give up U.S. citizenship." This is key -- using motivation to determine the punishment for a crime seems OK (i.e. degrees of murder). But using motivation to determine whether or not something is a crime, just feels ridiculous.
But there are crimes that are determined by intent. For example, providing incorrect information is not inherently criminal, but knowingly providing incorrect information with the intent of personal gain is considered fraud, which is a crime.
Maybe he should refuse money from such companies? (will not happen of course!)
Article 13. (1) Everyone has the right to freedom of movement and residence within the borders of each state. (2) Everyone has the right to leave any country, including his own, and to return to his country.
Article 15. (1) Everyone has the right to a nationality. (2) No one shall be arbitrarily deprived of his nationality nor denied the right to change his nationality.
So... Not the best document in the world to quote on this front.
Viewing the UNDHR as anything more than what should be minimally aspired to strikes me as... well... evil.
While legal it's sleazy.
Repeat after me: the problem is not personal income tax, but rather corporate tax, especially when abused to mask personal income.
Because Eduardo is not paying any exit tax based on capital gains he would have by selling his stock at the moment. Oh wait he is!
"Oh but the value of the stock may increase!" Yes, but it can also decrease.
I know of tens of people who owed capital gain taxes on IPO shares they couldn't even sell (due to SEC rule 144, look it up), the shares tanked, and they were still on the hook for taxes even though their best realizable profit ended up less than what they owed in taxes.
Yes, the US tax system is f*cked up in multiple ways. I'm not aware of any other country in which you can strike gold in an IPO as a founder, investor, or employee, and -- due to a market event outside of your control -- face a tax bill strictly larger than you could ever have legally derived. (again, look up SEC rule 144)
No, this is not fiction - I was luckily saved from such a fate by virtue of the "exit" event (an acquisition) happening before July; had it happened a few days later (July 1st or later), I would have lost money on an investment with a nice 3x-8x return (depending on how you measure). In the end, I didn't lose money, but hardly profited.
I know others who weren't so lucky, and if you (or someone you know) were in the tech scene/bubble in San Francisco in 2000-2001, you probably do too.
tl;dr: I did not do a 83(b) election. Never assume you know how taxes work, almost no one does.
I invested in a company, as in, paid cash for preferred shares. That company was later acquired, in a stock+cash deal, mostly stock. The way the tax code works, I realized the gain on the day the deal went through. assume 5x short term gain in NY or CA: That's ~50% tax on the gain, or 2x in taxes ON THE DAY OF THE DEAL. but .. there's rule 144; I didn't pay for the acquiring company's stock - I was given them in exchange for the acquired company stock. So I have to wait 6 months to sell them.
During these 6 months, the acquiring company tanks 60%. My 5x (for which I already paid 1x) is now worth 2x, which I already paid in taxes -- I've lost all of my gains, and my initial investment. Again: I paid 1x originally + 2x in taxes, and now hold something worth 2x in my hands, for a net of -1x, on a successful investment!
Here's where the magic of dates come into play: if the deal goes through in jan-june, 6 month lockup ends within the same calendar year, and you can net the profit and loss. Which happened, luckily for me. If it is in jul-dec, you can't.
The acquiring company was 100 times larger than the company I invested in, and I was a minority investor there. Other than making the initial investment, I had absolutely no say about any deal -- the first time I could do anything was 6 months after the deal date, at which point I had already suffered all the consequences.
edit: corrected the math.
clarification: the numbers are not factual from my case. I actually ended with a modest 0.3x post-tax profit, everything taken into account (on a 5x acquisition!). The deal was very complex - the example I gave here makes it easier to understand.
Even if you hadn't been able to net them off now they (in theory) reduce your future tax liability. Of course, generally speaking it is unlikely to end up applying those losses to income taxed at that high a rate. And there are former coworkers of mine (who lost badly trying to hold onto ISOs) that refer to capital-loss carry-forwards that their children will inherit. Nevertheless, the reality is at least the tiniest bit less bad than it sounds.
IIRC, there's a 7 year limit of how long you can carry capital losses - though there might be some way around that....
> Nevertheless, the reality is at least the tiniest bit less bad than it sounds.
It is, for an investor who invests regularly, and a positive overall result - these things will cancel out.
If you don't have a good investment opportunity every 3-5 years, it's basically as bad as I described.
Small time investors (in my case, this was an investment in a friend's business), employees and entrepreneurs are worse off, although professional investors are, in fact, reasonably out of tax harm's way in this sense.
You can critique this policy (and many do), but this new Schumer proposal is an extension of it, not a change in direction.
How far would his case against Zuckerberg have gone if he'd filed it in Singapore?
What the hell happened to HN?
If the legal system was corrupt or inefficient, he'd never have gotten his money. It only seems fair to pay to support it. Particularly given the fairly low tax rate. There are precious few places and ways you can earn hundreds of millions of dollars and only pay 15% on them.
That said, it sounds like he has paid tax once and is possibly trying to avoid paying tax on the appreciation of that property, which I will also admit muddies the waters quite a bit.
Basically, you can use the US court system even if you never once set foot in the US, and never had a US passport - as long as the party you are suing is bound by US law. Theoretically, the outcome should be the same.
I'm not sure what the tax consequences are, but in general, if you get a remedy from the court, the tax is the same as the original transaction (possibly none).
Sadly, this is an effective technique. A number of California state representatives use it as well.
[1]: http://www.bloomberg.com/news/2012-05-12/facebook-co-founder...
EDIT: added "tax".
Capital gains on the sale of capital assets (i.e., stock) by foreign persons are not taxable by the U.S. Only certain types of capital investment (i.e., real property or income that is connected to a U.S. business activity) is taxable by the US. See generally Section 871 and its accompanying regulations.
Capital gains by foreign persons are generally taxed by the foreign person's country of residence unless the foreign person has a tax nexus to the U.S. Generally, the tax nexus is provided by citizenship, actual residence, or deemed residence. Id.
Eduardo is not an actual or deemed resident of the U.S., thus his only tax nexus was via his citizenship. By renouncing his citizenship, he severs that last bit of tax nexus.
Consequently, the sale of the Facebook stock is now taxable only by the foreign jursidiction in which he is a citizen/resident. In this case, Singapore does not impose a capital gains tax, so he would effectively not be subject to any tax at all on the sale of his Facebook stock.
This matters because Singapore is one of the few non-tax haven jurisdictions that provides for no capital gain taxation. It's also unusual that he did so around the same time that Facebook began publicly indicating it would move toward an IPO, despite Eduardo having been eligible for Singaporean citizenship for some time before he actually renounced his U.S. citzenship. Note also that Eduardo "resides" in Singapore but spends significant amounts of time outside of the country.
This is why so many people (including myself) think Eduardo renounced his citizenship to avoid paying taxes. It's the circumstances surrounding his renunciation which are suspicious. If he'd chosen to move to Europe, or China, or Hong Kong, or some other place, it wouldn't be an issue. But based on the totality of the circumstances, it looks like tax avoidance was his primary motive.
Hope this helps.
This is blatantly wrong.
The US, since 2008, has an exit tax. For the purposes of US taxation, what happens is that on the day that he loses his US citizenship, US-Eduardo sells all his things to Singapore-Eduardo at fair market price. Thus, he pays capital gain taxes up until that day.
After that day, it is up to the new jurisdiction: Singapore won't tax him for any further gains, most other countries would.
Either way, if facebook goes down between the day he loses citizenship and the day he actually sells, he has lost money.
He's saved some taxes already, but that's a result of a bet. Another way to make the same bet would have been to buy a call option (or sell a put option, or go long a forward or future) on Facebook stock.
Schumer is just looking for votes and publicity. And the media are happy to distort the story to make villains and heros, because they sell more ads that way.