Skip Ribbon Commands
Skip to main content

Proposed EX-PATRIOT Act Would Harshly Tax Former U.S. Citizens

07/06/2012


Eduardo Savarin was born in Brazil, but came to the United States and became a US citizen. He went to Harvard. If you remember The Social Network, when he was at Harvard, he met Mark Zuckerberg, and helped set up Facebook. So when Facebook went public May 18 at a price of $38 per share, it likely made Mr. Savarin a very rich man, worth about US$3 billion (at least on paper).

Eduardo has lived in Singapore since 2009. In September, 2011, he relinquished his US citizenship.

US tax rules generally require wealthy US citizens to pay tax an accrued, but unrealized gains at the time they expatriate. As a result, Eduardo probably had to pay US capital gains tax on his shares. He probably had to pay 15% of the increase in value from his purchase price (negligible) to the value at the time he renounced his citizenship.

The tax, however, was probably a lot smaller than what he would have paid if he had retained his citizenship. First of all, before the IPO, the shares would likely have had a significantly lower value. Secondly, the value has been rising over the past few months, as the underwriters tested the market. So the value was probably lower in September. And, because it is often hard to sell a large minority-interest block of stock without offering a discount, the value would have been still lower.

So by renouncing citizenship in September, Eduardo probably saved a bunch of US tax. More on this in the Wall Street Journal article, Should You Renounce Your US Citizenship?.

He says that renouncing his citizenship had nothing to do with US tax – he no longer lives in the US, and hence does not need his US citizenship. This may be true, but it’s also very convenient considering what's on the horizon.

Proposed Legislative Changes

A new proposed legislative change called the Expatriation Prevention by Abolishing the Tax-Related Incentives for Offshore Tenancy (EX-PATRIOT) Act, threatens to tax expatriated former citizens further. It will reinforce existing legislations by presuming that an individual has renounced citizenship for tax avoidance purposes, if she or he has, at the time of expatriation, a net worth of $2 million or more, or an average tax liability of $148,000 over the past five years.

The individual will have an opportunity to disprove the presumption. If the presumption holds, then the bill will impose a 30% tax on the expatriate’s future gains (this is itself strange, considering the long-term capital gains rate is only 15%). Any individual who does not pay this tax would be inadmissible to the United States.

There is already a provision that blocks individuals expatriating for tax reasons from returning to the United States (the 1995 “Reed amendment”), but it has never been used, and, due to changes in tax law since, probably could never be used.

The bill requires the IRS commissioner to evaluate the intent of every “covered expatriate” (people who meet the net worth/tax liability/filing requirement tests already existing). At this point, there is no such mandate.

One particularly troubling part of this legislation is that it would be retroactive – it covers any person who expatriated as long as 10 years prior to enactment.

The reality of this proposed legislation is that it threatens to interfere with taxpayers’ ability to plan their affairs, and opens the door to capricious, politically-motivated confiscation of wealth. Should this legislation pass, it could effectively penalize successful citizens who for any reason choose to give up citizenship. The implications of this act are worrisome and anyone doing business in the United States, or at all interested in taxation legislation and government regulation, should keep a close eye on this changing situation.