Facebook Co-Founder, Patron Saint of Tax Renunciants

by Peter Spiro

Facebook co-founder Eduardo Saverin has given up his US citizenship in the run-up to the Facebook IPO.  Not that it didn’t cost him.  High net-worth folks like Saverin have to pay what is in effect an exit tax, under the mis-acronymed HEART Act.  Under this 2008 legislation, renunciation is treated like a tax event, at which point your assets will be valued for capital gains purposes as if they were sold at that time.  Saverin must have been presented with a hefty bill by way of getting his release (according to this excellent Bloomberg report on his renunciation, he can pay it on the installment plan).

[FYI: Here is the 1Q 2012 list (as published in the Federal Register) of “those who have chosen to expatriate.”  In addition to Saverin, the list includes a JFK relation, one apparently not interested in a political career here.]

Saverin doesn’t have a problem with the US – he doesn’t seem to be making any sort of political statement here – but the tax and regulatory burdens outweigh the benefit for someone in his bracket (see the posts on FATCA below).  That is, so long as he can still go to NYC.  Under 212(a)(10) of the Immigration and Nationality Act:

(E) Former citizens who renounced citizenship to avoid taxation.- Any alien who is a former citizen of the United States who officially renounces United States citizenship and who is determined by the Attorney General to have renounced United States citizenship for the purpose of avoiding taxation by the United States is excludable.

Excludable, as in not getting into the country.

Obviously Saverin has capable lawyers who checked this out, and it appears to be the case that this provision has never been deployed since it was enacted in 1996.  The plausible theory here: since Saverin and his bracket in effect have to settle up when they renounce, they aren’t renouncing to avoid taxation.

In any case, Saverin may be at the leading edge of rich expatriate Americans for whom the nationality just isn’t worth it any more.  Like most other memberships, citizenship has a price point.

More from NYT on US Overseas Tax Reach: Will FATCA Fly? (Maybe.)

by Peter Spiro

Here’s yet another long-ish story in the NY Times on the Foreign Account Tax Compliance Act, or FATCA, and how it’s cramping American citizens abroad. (How many tax stories get this kind of play? NYT must have some reader traction on this.)  Remember: the US is the only country other than Eritrea that taxes its external citizens.

Dueling takeaways: More AmCits abroad are complying with related disclosure requirements (almost doubled in the last three years), so it is sticking. Or, the numbers of Americans abroad who are looking to renounce their citizenship is skyrocketing (one accountant says that her Middle-Eastern clients are “lining up to get rid of the US passport), so it’s bound to fail. . .

FATCA Fallout: Mass Renunciations?

by Peter Spiro

The Foreign Accounts Tax Compliance Act (FATCA) continues to prompt intense opposition from Americans overseas.  In my post below, I suggested that some would simply take their citizenship underground, on the expectation of imperfect enforcement and the continuing value of holding a US passport — becoming, in effect, secret Americans.

Others are predicting that large numbers of Americans abroad will shed their citizenship. This isn’t entirely implausible. Many hold dual citizenship with their state of residence, so they wouldn’t go stateless. Their state of alternative nationality is often a quality citizenship (EU, Canada, AUS, NZ), in the sense of allowing visa-free travel through much of the globe (including to the United States).  If you have permanently relocated to, say, France, US citizenship doesn’t do you much good.  In the past, it didn’t do you much harm, either, but now it poses some significant costs.  There may be sentiment involved, but what is sentiment against thousands of dollars in annual accounting fees by way of FBAR and FATCA compliance?

So rational Americans abroad might just ditch the citizenship, through formal renunciation (official instructions here).  There’s a suggestion here that demand might require mass renunciation proceedings, a sort of anti-matter version of July 4 naturalization ceremonies.

I doubt it’ll come to that, but if renunciations happen in large enough numbers for the MSM to notice, what would the reaction stateside be?  One could imagine a “good riddance” response, as in, these people don’t live here any more, don’t have much continuing connection, and aren’t even willing to pay their taxes. See you later.  It might be a back door way to police dual citizenship, still unpopular with some folks.  It takes care of happenstance Americans — those born here but who left at a young age, for whom there won’t even be sentimental values in the balance.

On the other hand, the symbolism of nontrivial numbers renouncing their US citizenship would be pretty bad.  A lot of these people would look like real Americans (many of them native born), in the sense of socio-cultural identity.  It would drive home a point that US citizenship isn’t really that special any more — not worth the trouble of dealing with a lot of paperwork, much less actual additional tax liabilities.

It might also conceivably result in economic loss.  The tax revenue, for starters, enough to balance out any gains from FATCA enforcement.  An important reason that other countries have moved to accept dual citizenship (and not to tax their diasporas) is to cement economic connections to the homeland.  This may be less of a concern in the US context, but it can’t be a good thing to alienate (literally) your natural economic agents in the global economy.

US Tax Overreach: Enforcing Against Expats

by Peter Spiro

The US is one of the few countries in the world to tax nonresident citizens. But enforcement overseas has never been easy, or much of a priority.  That is, until the authorities uncovered some big-time asset offshoring by resident citizens (yes, in Swiss bank accounts) for purposes of tax evasion.

That resulted in legislation directed at foreign holdings of all US citizens, resident and non, in the form of the Foreign Account Tax Compliance Act, FATCA.  A core purpose is to systematize data collection on the earnings and assets of Americans abroad – the estimated 4-6 million of them.

For those of you not studying your NY Times on the day after Christmas, you can find a good description here.  FATCA will pose a huge burden on any foreign financial institution that have US citizen depositors.  For big institutions that will inevitably have US customers, the law represents a big administrative expense.  Smaller ones will just start turning away US customers.  For nonresident citizens, it means lots of extra paperwork (James Fallows collects some vignettes here and here).  It’s also meant to send a clear signal that the IRS is going to get serious about collecting on Amcits abroad (though it apparently will forgive those who have failed to file in the past).

I see two possible endpoints to the FATCA gambit:

1) The US will have to back down.  Read the comments to this WSJ article on FATCA – some very unhappy folks out there, with strong arguments hinging on American competitiveness.  See also this round-up of diaspora efforts to fight back. US citizens overseas are allowed to make campaign contributions, and you can bet this is the kind of issue they care about.  (Presidential candidates now swing through London to do fundraisers.)  Other governments can’t be happy about it, either, as they feel the heat from financial sector constituencies.

2) If the US can make FATCA stick, some nonresident citizens will renounce, especially those with large tax exposures.  But the law will also spawn a new class of secret Americans.  Unwilling to go through the hassle of filing annual tax returns and switching their checking accounts to compliant institutions, they will keep mum about their US citizenship status (at the same time that they hold citizenship in their country of residence).  These individuals won’t go through with formally renunciation, which may be tricky if they haven’t been tax compliant in the past.  These secret Americans will have the passport in a drawer, good for a rainy day and their children’s right to claim the status (on the expectation that FATCA won’t be forever), but they otherwise won’t identify themselves as such.  The IRS doesn’t have a master list of US citizens.  It will collect from some but drive others underground.

This will be interesting to watch but looks like a bad move.  Any extra revenue will be outweighed by all the bad blood.  Another reason not to wave the flag.