U.S. Senator Charles Schumer proposed a 30 percent capital gains tax on people such as Facebook co- founder Eduardo Saverin unless they show they didn’t renounce their U.S. citizenship to avoid taxes.
Saverin, 30, the billionaire co-founder of Facebook Inc. (FB), renounced his U.S. citizenship, which was reported earlier this month in advance of tomorrow’s initial public offering that values the social network at as much as $104 billion. He will save at least $67 million in income taxes by dropping his citizenship, according to data compiled by Bloomberg.
Schumer’s proposal would empower the Internal Revenue Service to impose a 30 percent capital gains tax on future investment gains of wealthy individuals who the agency decides renounced their citizenship to avoid taxes. It also would bar such people from re-entering the U.S. Schumer said he will advance the legislation “as quickly as possible.”
“This tax-avoidance scheme is outrageous,” Schumer said. “This is a great American success story gone horribly wrong.”
Saverin, who was born in Brazil and became a U.S. citizen in 1998, said in a statement today that his decision to drop his U.S. citizenship “was based solely” on his desire to live and work in Singapore, where he has resided since 2009. Singapore doesn’t impose a tax on capital gains.
“I have paid and will continue to pay any taxes due on everything I earned while a U.S. citizen,” Saverin said. “It is unfortunate that my personal choice has led to a public debate, based not on the facts but entirely on speculation and misinformation.”
Facebook plans to raise as much as $16 billion in its initial public offering, the largest in history for a technology company. Saverin’s stake is about 4 percent, according to the website whoownsfacebook.com, and may be worth as much as $2.89 billion, based on the company’s 1.898 billion total shares outstanding. His holdings aren’t listed in Facebook’s regulatory filings.
Saverin, who helped Mark Zuckerberg start Facebook in a Harvard University dormitory, joins a growing number of people giving up their citizenship ahead of a possible increase in tax rates for top earners.
Top Tax Rate
Unless Congress acts, the income tax rate on top U.S. earners like Saverin will rise to 39.6 percent from 35 percent on Jan. 1 when the George W. Bush-era tax cuts expire. The top tax rate on capital gains will increase to 23.8 percent from 15 percent.
Also set to take effect Jan. 1 are portions of the Foreign Account Tax Compliance Act, which seeks to prevent tax evasion by U.S. citizens with offshore accounts. The 2010 law requires financial institutions based outside the U.S. to obtain and report information about the accounts of U.S. clients.
Last year, 1,780 people renounced their citizenship, up from 235 in 2008, Schumer said.
Saverin’s name is on a list of people who chose to renounce citizenship as of April 30, published by the Internal Revenue Service. He made that move “around September” of last year, his spokesman, Tom Goodman, said in an e-mailed statement this month.
Schumer’s proposal requires the IRS to determine whether individuals with a net worth of at least $2 million, or who have an average income-tax liability of at least $148,000, renounced their citizenship for tax-avoidance purposes.
If the IRS determines that tax avoidance was a main reason for renouncing citizenship, that person “will be barred from any type of re-entry into the United States,” according to a summary of the legislation provided by Schumer’s office.
Current law empowers U.S. officials to deny a visa to a former citizen who is determined to have renounced citizenship to avoid taxation.
“By all accounts Mr. Saverin has renounced his U.S. citizenship for the purposes of avoiding taxes despite taking advantage of the multiple opportunities afforded to him by the United States,” Reed said in the letter.
Schumer said current law lacks an enforcement mechanism and no one has been barred from re-entering the U.S. for that reason. “Our bill fixes this,” he said.
“Setting up a mechanism may be a good way of saying, ‘We really, really, mean this,”’ Crystal Williams, executive director of the American Immigration Lawyers Association, said today in a telephone interview. She said it may be difficult for the IRS and immigration officials to coordinate.
“Whenever two agencies try to work together, there are intrinsic pitfalls in that,” she said.
More broadly, Williams said, 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 gives up U.S. citizenship.
While noting that he wasn’t familiar with Schumer’s proposal, Senator Orrin Hatch of Utah, the top Republican on the Finance Committee, said he opposed people giving up their citizenship to avoid paying taxes.
“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.”.
“If we had tax reform, this wouldn’t be happening,” said Grassley, a former chairman of the Senate Finance Committee.
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