The U.S. has a citizenship-based taxation system, so citizens must pay taxes regardless of residence. The U.S. shares this policy with exactly one other country in the world, Eritrea.
You can critique this policy (and many do), but this new Schumer proposal is an extension of it, not a change in direction.
We're not talking about citizens paying taxes. We're talking about ex-citizens. I seem to recall hearing something about "no taxation without representation" somewhere before.
Well I don't think that resigning your citizenship means that you don't have to pay any taxes for that year. And if he didn't pay any taxes on the stocks he owns, that would be a much larger dodge of >$600 million. So people who have left the country within the last year still have to pay taxes on their earnings.
Wasn't he a US citizen when he sued in US court for proper recognition and partial ownership? It seems only fair to pay American tax on the fruit of that windfall.
How far would his case against Zuckerberg have gone if he'd filed it in Singapore?
I'll be the first to admit that I don't know how jurisdiction would work in a case like that. But it seems to me that paying taxes on money recovered for you by a legal system is a fair price for the service.
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.
> But it seems to me that paying taxes on money recovered for you by a legal system is a fair price for the service.
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).
He doesn't live here and isn't a citizen. The number of non-native, former citizens who end up to be instant billionaires has to be a very small group (likely a party of 1)... To make any law that addresses it is inane.
Of course it is, but it plays well with the 'tax the rich' folks. Schumer isn't really proposing legitimate legislation, he's campaigning for votes. One technique he uses is to propose legislation that can't pass the full senate, much less the whole process of getting into law, so that the big headlines like these will get folks who want to 'stick it to the rich' to vote for him.
Sadly, this is an effective technique. A number of California state representatives use it as well.
My interpretation of that would be that if we already have one of the world's harshest tax policies in that regard, why would we want to have a reputation for being even worse? Do we want to make productive foreigners even more wary of acquiring US citizenship?
Before Eduardo Savarin was a US citizen, he wasn’t a productive foreigner; he was a teenager who had been targeted for kidnapping in his native Brazil. (http://pandodaily.com/2012/05/12/what-eduardo-saverin-owes-a...) His father was a wealthy businessman (which is why Eduardo had been kidnap-worthy), but I don’t know if he was wealthy enough to qualify for immigration to Singapore.
How about a 5% anti-Chuck-Schumer tax, whereby any elected representative would be charged a 5% higher marginal rate if it could be shown that he had been proposing bills for show rather than for use.
Expatriating upon IPO may be somewhat uncommon, but renouncing citizenship for various money-saving reasons is more common than we may expect. One prominent example would be George Soros, similarly moving to Singapore a few years ago. (I believe his excuse was that Asia will be the center of the world in the future, and he wanted his children to be educated there, or something along those lines).
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.
No, Your example is wrong factually. It is not George Soros, but his cofounder in original Quantum Fund, Jim Rogers http://en.wikipedia.org/wiki/Jim_Rogers. We need to do fact checking before we write down anything.
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.
Much more troublesome, to me, are companies that operate in some country (with staff and buildings) but which are registered in some other tax haven, thus avoiding the need to pay taxes.
And that's where the real money is, so you'll never hear anyone proposing bills to address that. Enforcing decency is left to understaffed and underfunded national collection agencies.
Repeat after me: the problem is not personal income tax, but rather corporate tax, especially when abused to mask personal income.
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.
That's the hazard of Section 83. You greatly minimize your tax exposure if the stock increases in value, but you take a wash if it sinks. If you didn't want to take the risk of a loss, you should not have elected into Section 83.
> If you didn't want to take the risk of a loss, you should not have elected into Section 83.
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.
From what I recall, the losses are as real as the taxes.
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.
> 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.
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.
Isn't he renouncing US citizenship because Singapore doesn't allow dual citizenship? Was keeping US citizenship while living there even an option for him?
That's not why. You can live in Singapore as a permanent resident for the price of starting a corporation ($150), which then simply hires you as an employee. Or you can have $20m and qualify for an investor exception—for which I'm pretty sure Saverin qualifies. (Note: The above numbers are from memory and may not be exact, but they're in the right ballpark.)
Be interesting to go through Chuckie's list of Top 100 corporate donors and figure out which ones are using "Double Irish" and similar schemes to avoid taxes.
Maybe he should refuse money from such companies? (will not happen of course!)
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 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.
Point 3 is the most dangerous. The language you chose is telling, "crime". Schumer seems to want to use Saverin's motivation to determine that giving up citizenship to avoid paying taxes is a crime. Besides it being unconstitutional to legislate against a specific person, what kind of message is Schumer sending? Once you venture into the maw that is the United States tax code, you can't leave without heavy personal losses? That sends the message that your business is not welcome here at best, and is draconian at worse, setting a dangerous precedent for even more oppressive legislation later. But in an era of occupy, Schumer can use all the class warfare arguments he wants to get his proposed legislation passed easily. People will foam at the mouth in anger against this millionaire not paying his fair share, and they'll be completely oblivious of government infringing on civil rights until it's their own civil rights that are taken away, and by then it will be too late to do anything about it.
“It always bothers me when somebody renounces his citizenship in the greatest country on Earth just to save money, save taxes,” Hatch said in an interview. “I was really upset at Eduardo Saverin for doing that, and there are others who are doing it too.”
And, he added, “they’re going to rue the day that they did that.”
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.
It's not a matter of spite--it's the fact that Eduardo's primary claim to life and wealth is due to America: coming to America saved Eduardo's life as a youth after he became the target of Brazilian kidnappers, getting an American education led to the opportunity to be Facebook's angel investor, and the American justice system is the sole reason that Eduardo has any claim to Facebook stock today.
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.
I'm saying he owed us in both the legal and moral sense. I do not know whether (or if so, when) Eduardo has paid taxes on his Facebook shares, so I cannot opine on whether he still owes us under the laws currently in effect.
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.
As far as I understand the stories, under the current law he's legally in the clear.
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.
Why are you so intent on something bad happening to him? In the large scale of things - he got screwed when it came to Facebook.
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.
Why would he be going to prison in Singapore? Is he known for breaking laws?
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.
I'm not sure that it follows that the point of the US is to extract taxes indefinitely from those who benefit from a well constructed country. If the structure of the country becomes hostile to a person, they should be able to vote with their feet. It is substantially easier for the rich to do this, but the solution is to make it easier for everyone, both coming and going. Responsiveness should be the goal on every level, local, state, federal.
I agree, but the key problem is that the U.S. tax system is structured to collect taxes after the period to which they relate. This is done to minimize the compliance burden on taxpayers and to minimize the IRS' burden in ensuring compliance. The alternative is to collect all taxes as they accrue (like sales taxes are now), which would significantly increase compliance costs for taxpayers and the IRS's workload.
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.
> 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.
It is exactly a matter of spite. tl;dr: he is playing by the rules. people are spiteful because they think he is abusing a loophole in those rules (I disagree).
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.
People disagree on whether he is/was playing by the rules, and this is the very heart of the debate.
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.
I might have found this argument (for "not being spiteful" or "it's fairness, not just political gain") compelling, if Schumer and the media was having the same feat over the double-irish sandwich practiced for years by the like of Apple, Google and Microsoft (with some "nevada sauce") -- where the cumulative effect on the bottom tax line over the last few years is about a hundred to a thousand times larger than the saverin case (we're talking 60M right now vs. 20-60B).
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.
The media did have the same feat over the double-irish structure. It's possible that you did not notice this at the time, but there was definitely an uproar over what many considered to be tax evasion by U.S. companies. In fact, there was another uproar about this earlier this year when Apple was approaching its recordsetting valuation--many newspapers were pointing out Apple maintained an extremely large overseas cash hoard utilizing the double-irish to avoid paying U.S. taxes on that money. Several legislators have brought that up, on both sides, as justification for either doing away with corporate tax breaks, or for doing away with worldwide taxation. 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.
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.
> The media did have the same feat over the double-irish structure. It's possible that you did not notice this at the time, but there was definitely an uproar over what many considered to be tax evasion by U.S. companies.
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.
He became a citizen and he got the benefits of being a US citizen.
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.
Laws are not best created out of spite. In fact, such laws are unconstitutional. According to the Constitution, "No bill of attainder or ex post facto law shall be passed." The bill of attainder here is attacking Saverin, as Schumer and Hatch have been doing to gain support for their bill, and passing a law making what Saverin did illegal. That they want to charge him 30% capital gains tax is questionable tax policy at best (especially when countries like Singapore with no capital gains tax are luring away money), but that they also want to bar him from visiting the United States for the rest of his life is oppressive.
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.
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.
Well... there's also a right to asylum (14), group rights for families, to some form of social maintenance (22), limitation of working hours and minimum wage (24), full and free education (26), to copyright (27). Lastly there are vague duties to your "community" and it has power to determine what justly fulfills a grab-bag of ethical and legal concepts (29).
So... Not the best document in the world to quote on this front.
Wow, a modern-day Bill of Attainder/ex post facto law. Someone should acquaint Schumer with Article I, Section 9 of the Constitution of the United States.
Lol. I just realized why people aren't understanding my other comments about why this debate matters. Here's an explanation:
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.
> 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 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.
> The exit tax only applies to tax the built-in gain (appreciation) of Eduardo's assets at the time the renunciation is effective, but not to the sale of his Facebook stock itself. In law, little technical details like that matter.
Is that describing a different end result than the way I described it? recap:
>> 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
Alternatively, assume US-Eduardo sells it to his cousin Singapore-Eduardo2, pays capital gain taxes to the US, and -- once no longer a US citizen, gives the remaining money back to cousin Singapore-Eduardo2 as a gift, and cousin Eduardo2 gives the shares back to Eduardo (now Singapore-Eduardo) as a gift. Singapore has no gift tax, so this is probably kosher with Singapore (I'm not familiar with Singapore tax law, but I know of other jurisdictions in which this is perfectly fine).
There is a complete disconnect between appreciation until denunciation and appreciation(or depreciation) after that date, while the overall effect for everyone involved is exactly the same, and everything is legal in all jurisdictions. Practically, this is what is happening.
> The hubub is about the appreciation between the renunciation effective date, when Eduardo paid taxes on his Facebook stock, and the IPO today/tomorrow, when he sells that stock. That appreciation is not taxed by the U.S., nor by Singapore
So, it's a hubbub about envy and nothing else. Had he done that a couple of years ago, or a couple of years from now, no one would have cared; or if there was no hype about a 25% increase, which would mean there were essentially $0 to be collected. It's only because people believe that luckily for him, the week his denunciation was accepted (note: he applied for it 8 months ago!), the stock jumped 25%, and that he has a chance to realize that profit next week.
> and that is the appreciation that the Senator is attempting to capture with his crazy law.
Now it is a crazy law. And just a few posts ago, you seemed to be supportive of measures that would tax saverin better... interesting.
> If the value of the facebook stock had gone down between the time he paid taxes and the time he sold, he would have be able to recover that money on his U.S. tax return for 2012
That is news and surprising to me. I'll take your word for it, since you are the expert (I just pay experts too much to do my taxes, and don't claim to have comprehensive understanding).
But that just means that there's a bug in the tax code that needs fixing:
If I'm not mistaken, if you become a US tax payer in september, you don't have to pay taxes for gains earlier that year, and you cannot take credit for losses earlier - only from the date you became a tax payer. The symmetry would require that you should not be able to take credit for losses after losing your tax payer status, just as you don't have to pay for gains after losing that status. Apparently there's a bug, and that's what needs to be fixed -- not introduction of new laws. They have until the end of the year to fix it.
Also, if there were no deals in facebook shares that week, the IRS should be able to claim the value was already IPO-high at the day of renunciation, and if challenged, a court might even find that reasonable.
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[ 5.0 ms ] story [ 153 ms ] threadYou 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.
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.
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.
[1]: http://www.bloomberg.com/news/2012-05-12/facebook-co-founder...
EDIT: added "tax".
Maybe he should refuse money from such companies? (will not happen of course!)
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.
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.
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.
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.
Is that describing a different end result than the way I described it? recap:
>> 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
Alternatively, assume US-Eduardo sells it to his cousin Singapore-Eduardo2, pays capital gain taxes to the US, and -- once no longer a US citizen, gives the remaining money back to cousin Singapore-Eduardo2 as a gift, and cousin Eduardo2 gives the shares back to Eduardo (now Singapore-Eduardo) as a gift. Singapore has no gift tax, so this is probably kosher with Singapore (I'm not familiar with Singapore tax law, but I know of other jurisdictions in which this is perfectly fine).
There is a complete disconnect between appreciation until denunciation and appreciation(or depreciation) after that date, while the overall effect for everyone involved is exactly the same, and everything is legal in all jurisdictions. Practically, this is what is happening.
> The hubub is about the appreciation between the renunciation effective date, when Eduardo paid taxes on his Facebook stock, and the IPO today/tomorrow, when he sells that stock. That appreciation is not taxed by the U.S., nor by Singapore
So, it's a hubbub about envy and nothing else. Had he done that a couple of years ago, or a couple of years from now, no one would have cared; or if there was no hype about a 25% increase, which would mean there were essentially $0 to be collected. It's only because people believe that luckily for him, the week his denunciation was accepted (note: he applied for it 8 months ago!), the stock jumped 25%, and that he has a chance to realize that profit next week.
> and that is the appreciation that the Senator is attempting to capture with his crazy law.
Now it is a crazy law. And just a few posts ago, you seemed to be supportive of measures that would tax saverin better... interesting.
> If the value of the facebook stock had gone down between the time he paid taxes and the time he sold, he would have be able to recover that money on his U.S. tax return for 2012
That is news and surprising to me. I'll take your word for it, since you are the expert (I just pay experts too much to do my taxes, and don't claim to have comprehensive understanding).
But that just means that there's a bug in the tax code that needs fixing:
If I'm not mistaken, if you become a US tax payer in september, you don't have to pay taxes for gains earlier that year, and you cannot take credit for losses earlier - only from the date you became a tax payer. The symmetry would require that you should not be able to take credit for losses after losing your tax payer status, just as you don't have to pay for gains after losing that status. Apparently there's a bug, and that's what needs to be fixed -- not introduction of new laws. They have until the end of the year to fix it.
Also, if there were no deals in facebook shares that week, the IRS should be able to claim the value was already IPO-high at the day of renunciation, and if challenged, a court might even find that reasonable.