Facebook Co-Founder Stands to Gain Choosing Singapore Over U.S.

Sunday, 13 May 2012 02:28 PM

 

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Eduardo Saverin, the billionaire co-founder of Facebook Inc., renounced his U.S. citizenship before an initial public offering that values the social network at as much as $96 billion, a move that may reduce his tax bill.

Facebook plans to raise as much as $11.8 billion through the IPO, the biggest in history for an Internet company. Saverin’s stake is about 4 percent, according to the website whoownsfacebook.com. At the high end of the proposed IPO market capitalization, that would be worth about $3.84 billion. His holdings aren’t listed in Facebook’s regulatory filings.

Saverin, 30, joins a growing number of people giving up U.S. 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 holds its IPO.

“It’s plainly lawful and at the same time profoundly ungrateful to the country that provided these opportunities for him,” said Edward Kleinbard, a tax law professor at the University of Southern California in Los Angeles. “He benefited from his U.S. education, the contacts he made at Harvard, and most important the extraordinary openness and flexibility of our economy that encourages startup ventures to flourish.”

Saverin’s name is on a list of people who chose to renounce citizenship as of April 30, published by the Internal Revenue Service. Saverin made the move “around September” of 2011, Tom Goodman, a spokesman for Saverin, said in an e-mailed statement.

‘Practical’ Residence

“Eduardo recently found it more practical to become a resident of Singapore since he plans to live there for an indefinite period of time,” Goodman said.

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 don’t sell the shares, said Reuven S. Avi-Yonah, director of the international tax program at the University of Michigan’s law school. In other words, for tax purposes, the IRS treats the stock as if it has been sold.

In 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 shares trade publicly.

Saverin and his advisers could say that the value of his stake should be reduced for tax purposes because of the potential difficulty of selling the shares while the company was private.

‘Smart Idea’

Renouncing citizenship well in advance of an IPO is “a very smart idea,” from a tax standpoint, Avi-Yonah said. “Once it’s public you can’t fool around with the value.”

And even the tax bill triggered by Saverin dropping his U.S. citizenship can be deferred indefinitely until he actually sells the shares. In that case, Saverin would have to pay interest during the deferral period -- currently at an annual rate of 3.28 percent per year, Kleinbard said.

Gains from any future appreciation of the stock will be earned free of any capital gains tax both in the U.S. and in Singapore. Singapore does not impose a capital gains tax.

While Saverin helped start Facebook, he hasn’t always had a harmonious relationship with Zuckerberg. He scuffled with his Harvard University classmate over his ownership in Facebook. Saverin sued him and settled for an undisclosed amount.

Brazilian Investment

The 2010 movie “The Social Network” portrayed Saverin as a scorned friend who provided the company’s early financing and then got squeezed out. In the film, written by Aaron Sorkin, Saverin was portrayed by Andrew Garfield, who will play Spider- Man in “The Amazing Spider-Man,” due to be released in July.

Saverin moved to the U.S. in 1992, and became a citizen in 1998, his spokesman said. He has invested in Asian, U.S. and European companies.

He plans to invest in Brazilian and in other global companies that have strong interests in entering the Asian markets, Goodman said.

Saverin’s U.S. holdings include Jumio Inc., an online payments company, and ShopSavvy Inc., a price-comparison service.

Renouncing citizenship is an option chosen by increasing numbers of Americans. A record 1,780 gave up their U.S. passports last year compared with 235 in 2008, according to government records.

Income-tax rates for top U.S. earners will rise to 39.6 percent from 35 percent next year and rates on capital gains and dividends also are due to rise, unless Congress intervenes.

U.S. Loss

“It’s a loss for the U.S. 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 LLP 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 Plc, Deutsche Bank AG, Bank of Singapore Ltd. and DBS Group Holdings Ltd. all say they have turned away business.

The 2010 law, to be phased in starting Jan. 1, 2013, requires financial institutions based outside the U.S. to obtain and report information about income and interest payments accrued to the accounts of American clients. That means additional compliance costs for banks and fewer investment options and advisers for all U.S. citizens living abroad, which may depress banks’ returns.

Facebook plans to price its IPO on May 17, offering 337.4 million shares at $28 to $35 each. The shares will be listed on the Nasdaq Stock Market under the symbol FB. Morgan Stanley, JPMorgan Chase & Co. and Goldman Sachs Group Inc. are leading the sale.


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