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Wednesday, May 16, 2012

Facebook Co-Founder Renounces US Citizenship

One of the the billionaire co-founders 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 allow him to skirt tax obligations and reduce his tax bills.

Facebook plans to raise as much as $11.8 billion through the IPO, the biggest in history for an Internet company. The co-founder's stake is about 4 percent, according to the website 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.

He 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 start Facebook in a Harvard University dormitory and stands 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. 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.

His name is on a list of people who chose to renounce citizenship as of April 30, published by the Internal Revenue Service. He had made the move several months ago in an effort to lower U.S. tax burdens.

‘Practical’ Residence

The co-founder recently found it more practical to become a resident of Singapore since he plans to live there for an indefinite period of time. Saverin still does hold Brazilian citizenship.

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. In other words, for tax purposes, the IRS treats the stock as if it has been sold.

In this 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 far less than its worth once shares trade publicly.

The co-founder 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. Once it’s public you can’t fool around with the value.

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

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 him as a scorned friend who provided the company’s early financing and then got squeezed out.

He moved to the U.S. in 1992, and became a citizen in 1998. 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. 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, 2012 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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