Did Eduardo Saverin’s bid to save taxes on his Facebook windfall by renouncing his citizenship backfire?

Eduardo Saverin, Facebook co-founder

The outrage that greeted news that Eduardo Saverin’s decision to renounce his U.S. citizenship was swift and widespread. And the clear verdict delivered by most observers was that this was a cynical move to lower a tax bill that he’d have to pay on the huge gains he would reap from his Facebook options.

Saverin denied this was the case, and insisted he would pay his fair share. He said he was simply doing it for practical reasons, because it would make it easier to do business in Asia.

Whatever the case, one pundit now thinks that Saverin’s move may have backfired in the wake of the disappointing Facebook IPO. In a post today, PrivCo Founder & CEO Sam Hamadeh said Saverin may actually end up paying more as a result of his decision, and not less.

It would be just the kind of just desserts so many critics would love to see. But is Hamadeh right? Here’s his calculations:

“Saverin’s tax avoidance has actually backfired, now costing him an extra $43 million in taxes per PrivCo calculations of Friday’s fallen price of$27.72/share. Saverin’s tax savings were contingent on the “sure thing” that Facebook, the most overly hyped and now most disappointing IPO of the decade, would rise sharply. By renouncing his U.S. citizenship in September 2011, PrivCo calculates that Saverin’s tax bill locked in at $461 million, as it is permanently tied to the September 2011 FB price of $30.58/share (according to Facebook internal third party valuation measure used for its RSU issuances to employees).”

According to Hamadeh, it looked like Saverin would save  $112 million in capital gains taxes, assuming the stock was valued at the $38 IPO price. With the share price falling to $27.72 on Friday, his capital gains tax would have otherwise fallen sharply. But because he is locked into the $30.58 per share price, Saverin is overpaying by $43 million, according to PrivCo calculations.

And it gets better:

“Since Saverin’s tax liability is permanently fixed at $461 million based on the September 2011 price, PrivCo calculates that he will overpay the United States Treasury $15 million for every dollar Facebook sinks below $30.58 than he otherwise would have owed to the IRS had he stayed an American.”

Hamadeh said:

“With so many Americans agreeing that Eduardo Saverin’s citizenship renouncement was a self-serving – and many feel downright disloyal – move, the fact that it has actually raised his tax bill, not lowered it, may be the ultimate Karmic Justice to many Americans.”

Facebook was down another 95 cents in early trading on Monday to $26.77.

So how bad could it get? Hamadeh estimated that if Facebook’ stock price falls below $4.95, Saverin’s gains could be completely wiped out by his tax bill. (Unlikely, of course, but still…).

Also worth noting, if Facebook’s stock rises and gets back in the black, Saverin won’t pay any U.S. taxes on the capital gains going forward.

On a side note, Hamadeh estimates that Mark Zuckerberg also shot himself in the foot by exercising so many options at the IPO:

“By exercising his taxable stock options on the eve of the IPO when the share price was at the $38 IPO price, Zuckerberg stuck himself with a $342 million tax bill as opposed to a $250 million tax bill had he exercised based on the June 1 close of $27.72/share.  “By law, the taxable amount is determined on the date of exercise; as a result, the IRS and the State of California will share in the extra $92 million in taxes Zuckerberg will pay, according to PrivCo calculations.”

You can read the full Facebook report by PrivCo here. 



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  • Dan

    This guy deserves it for trying to swindle America of its tax money.

  • Eduardo Saverin did not “swindle” the US. He paid every dollar in tax that he was obligated to pay. US law required him to determine the FMV of all his assets as of the date of his renunciation (January 2011) and obligated him to pay all capital gains taxes by a deemed disposition.

    Throughout history, people (both wealthy and poor) have move themselves and their assets around the world for a variety of reasons. This freedom of movement is generally accepted as a basic human right. When the US receives someone as a legal immigrant they herald them. When someone exercises their own free will and determines that they no longer want to live in the US, and legally depart, he is called a traitor. A bit hypocritical I would suggest.

    Senator Schumer gave a press conference the day before the IPO (http://www.bloomberg.com/video/92888269-schumer-casey-eduardo-saverin-facebook-tax-scheme.html) and criticized Mr. Saverin for having “evaded taxes of 67 to 100 million dollars”. He failed to mention several things 1) Mr. Saverin did NOT engage in illegal tax evasion. He exercised his right to engage in legal tax avoidance (the same thing someone does when they take a spousal deduction); 2) Mr. Saverin had paid several hundreds of millions of dollars in capital gains taxes based on the January 2011 deemed disposition; and 3) The 67 to 100 million dollar figure was based on the opening IPO price rather than the market price. Of course, as this article pointed out, this did not end up being the market price. In retaliation for what Senators Schumer and Casey called “an outrage”, they proposed the Ex-Patriot Act.

    I am a private client lawyer who for over 20 years has specialized in assisting HNW individuals efficiently organize themselves internationally. A large majority of my clients are expatriating Americans such as Mr. Saverin. In an upcoming book that I am co-authoring with a London School of Economics Professor Emeritus, we have labelled this client group, “The Golden Geese”. Today is my first day in the office after three successful weeks of speaking with European countries about bringing my American Golden Geese clients to their shores. During my trip the whole Ex-Patriot Act controversy erupted. Following up on last weeks surge of calls, I am responding to emails and setting up calls all this week with past, present and future Golden Geese clients who are in an uproar about the Ex-Patriot Act proposals.

    Since the US has a progressive tax system, where the top 1% account for well over a third of the total tax revenue, the views of the Golden Geese on this topic are important to the US. The two senators proposing this bill talked in their press conference about what a small number of people that this would affect. However, the point they missed is “quality” (i.e. whether these individuals are 1% super tax contributors) is much more important than “quantity”. If this proposal prompts even a small number of American Golden Geese to decide to leave, then it will have a large asymetric negative effect on local, state and federal tax revenue. As has been previously pointed out ( http://www.cnbc.com/id/47604025), what happens to this group in a positive or negative way has an immediate and profound impact on government tax revenues.

    Since you have expressed and interest in the Ex-Patriot Act, I thought that you might be interested in what the reaction of the Golden Geese has been to Senators Schumer and Casey ‘s initiative. In quick summary here are some of the points that my Golden Geese clients are making:

    -With the exception of currently only North Korea (Eritrea’s dictator only uses this as a method of securing a tithe for his regime upon passport renewal), the US is the only country that taxes based on citizenship. Every other developed country operates on the “If you are resident here (day count and/or connections) then we tax you”. The fairness of this tax basis is questioned by many Americans and by most wealthy people around the world.

    -During his press conference, Senator Schumer outlined why he thought that individuals like Mr. Saverin owed all their success to the U.S., and could not contemplate any situation where anyone would be justified in expatriations. Apparently, he was unaware (or ignoring the fact) that there are millions of people around the world who acquired their US citizenship by having one US parent. They never lived in the US; were never educated in the US; never made their wealth through the US; or often never even applied for a US passport. Many live and pay taxes in high tax countries like Canada. As a result of the new FATCA rules and a vast increase in sharing of banking information, these people are suddenly becoming aware of this unique basis for a previously unknown US tax burden. While they will update their filing and pay any US tax owed (rather than face the wrath of the IRS), they have no interest in continuing to do so in the future. This group already and will continue to account for a large number of expatriations. The justifications given for the Ex-Patriot Act ring very hollow to them;

    -Even expatriating Americans who were born or became naturalized (like Mr. Saverin) in the US will pay on the capital gains they made while US citizens. Just like any other US taxpayer. However, they have the added burden of a “deemed disposition” which makes that tax obligation immediate upon expatriation and not at a time when there is an actual sale. At the time of his expatriation (January 2011), Mr. Saverin held shares in a non-public company. He therefore was forced to calculate (and pay!) his capital gains based upon a reasonable valuation of those shares at that time. He had no assurance that those shares would ever go public or if it did, what the value of those shares would be when actually sold. Whether the valuation that the US government required him to place on those shares in January 2011 is higher or lower than what the value of those shares will be in the future is dependent on the market. Senators Schumer and Casey pulled numbers out of the air based on the value of those shares in the first hours of trading and conveniently failed to mention that Mr. Saverin had already paid enormous capital gains taxes as a result of US rules and might never see the values that they based their complaints upon. This was very well explained in this Bloomberg posting (http://www.bloomberg.com/news/2012-05-24/facebook-s-saverin-left-u-s-as-a-taxpayer-not-a-traitor.html). As your article pointed out, the supposed “tax loss” never happened in reality.

    -Expatriation has always been a perfectly legal tax avoidance strategy. What the senators are proposing is to retroactively impose a heavy financial penalty and the onerous denial of a basic human right of travel for having done something completely legal. A very apt analogy would be if someone legally avoids paying tax by contributing to their 401K or deducting their mortgage interest, then 10 years later a lawmaker such as Mr. Schumer calls such a thing “unpatriotic” and retroactively imposes fiscal and immigration penalties on them.

    -Many of my Golden Geese clients clearly remember the US government’s outrage that the then Soviet Union was charging an “exit tax” before it allowed Soviet Jews to depart ( http://www.cato.org/publications/commentary/hearkening-back-ussr) (http://news.google.com/newspapers?nid=1964&dat=19720909&id=XIAyAAAAIBAJ&sjid=N7cFAAAAIBAJ&pg=5168,3378291). Like these Senators, the Soviets then claimed that these individuals were state assets who had benefited from their education and economic system. This was the same reasoning behind the building of the Berlin Wall. The US politicians of the day howled in protest. Senators Schumer and Casey are proposing the same thing. The hypocrisy is not lost on the Golden Geese.

    -If the purpose is for the US government to maintain or increase its tax revenue by introducing this legislation, then I would venture to say that it will have the opposite effect for the following reasons:

    1) Golden Geese have been very wary of another tax grab. The Senators showed their hand on this one. Even if this doesn’t pass before the end of this congress, it will probably be re-introduced next year. The Golden Geese see the barn door closing and are already rushing to the exits. Future tax revenue, their investment dollars and the product of their entrepreurial zeal will all be lost;

    2) Tech Entrepreneurs and Venture Capitalist are already actively looking to abandon the US and this will just add fuel to the fire. Quite frankly you don’t need to be holed up in Silicon Valley to create the next Facebook. Look at Skype. You can get programming talent in a large number of other places. In addition, venture capital and private equity are not only available in the US. Finally, New York is not the only place in the world to take a company public.

    3) The US education system: With tuition rates already sky high and increased hassles for foreign students to get student visas, they are already looking to alternatives. MIT and other on-line and mixed media education options will continue to flourish as a result of this. Like any gambler entering a casino, these foreign students all hope to be the next Zuckerberg and win big. Putting a high cover charge and hassling bouncers is bad enough. Signally that the bouncers will take most of your earnings if you win isn’t going to help to attract a lot of quality participants.

    While my strong suspicion is that the senators proposed this simply as a crass election year political grandstand, it has spooked the Golden Geese. This is very dangerous for the US. I am just finishing reading “Why Nations Fail: The Origins of Power, Prosperity and Poverty” which talked about why places like Rome and Venice first flourished and then failed as a result of moving from inclusive to extractive/confiscatory political policies. This type of proposal is a giant signal as to which direction the US is moving. Each of these societies also thought they were unique and exceptional and that the rules of economics did not apply to them. Much to their dismay, they found out they were wrong.

  • As a follow-up to my posting above, here is a link to a podcast where I was interviewed and provide more background on the situation.