Facebook Inc. (FB:US) co-founder Eduardo Saverin will save at least $67 million in federal income taxes by dropping U.S. citizenship, according to a Bloomberg analysis of the company’s stock price. Those savings will keep growing if Facebook’s shares increase.
Saverin renounced his citizenship around September and he lives in Singapore, according to his spokesman, Tom Goodman. Saverin, 30, was part of a small group of Harvard University students who started the social networking site. He owns about 4 percent of the company, according to whoownsfacebook.com.
The would-be savings underscore why more people are giving up U.S. citizenship before potential increases in taxes for the highest earners. The value of Saverin’s stake has swelled along with increases in Facebook’s share price before its planned initial public offering. The company plans to sell shares for as high as $38 apiece this week, compared with $32.10 in private auctions on SharesPost Inc. on Sept. 26.
Saverin’s stake may be worth as much as $2.89 billion, based on the company’s 1.898 billion total shares outstanding. His stake was worth about $2.44 billion in September.
Bloomberg calculated the $67 million figure by applying the 15 percent U.S. capital gains rate to the approximate $448 million spread between the two values. Bloomberg’s methodology was reviewed by Robert Willens, an independent tax adviser based in New York.
“The calculations and assumptions are not only erroneous, they also further perpetuate the false impression that tax was the reason behind Eduardo’s decision,” Goodman said, declining to cite specific errors. “His motive had nothing to do with tax and everything to do with his desire to live and work in Singapore.”
Whoownsfacebook.com is published by Massinvestor Inc. and draws its information from Facebook’s filings with the U.S. Securities and Exchange Commission, press releases, news reports and other publicly available sources.
Saverin’s capital gains tax liability comes “at a time when the rate is probably the lowest it ever will be, and it’s a substantial discount to the value of what his position in Facebook will likely be two weeks from now,” said Edward Kleinbard, a tax law professor at the University of Southern California in Los Angeles.
Any profit from future appreciation of Saverin’s Facebook stock will be earned free of capital gains tax in the U.S. and Singapore, which doesn’t impose the tax.
“That’s got to be by far the biggest benefit, assuming Facebook’s stock appreciates at even a fraction of the level people expect,” Willens 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. Saverin’s bill would be about $365 million, though even that can be deferred indefinitely until he actually sells the shares.
In the mean time, Saverin could choose to only pay interest to the U.S. government during the deferral period -- now at an annual rate of 3.28 percent.
His savings may be even greater because Saverin’s tax advisers could argue that the value of his stake in September was less than the $2.44 billion used in Bloomberg’s calculation because selling such a large amount of stock at the then-market price wasn’t possible.
By locking in his liability last year, Saverin may enjoy one more benefit: The capital gains tax rate is set to increase to 20 percent or even higher.
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