Silicon Valley – Lessons in Expatriation

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I must admit, HBO’s hit series Silicon Valley is thoroughly entertaining. The show features a
team of upstart techies and their attempts to overthrow the established tech giants.

The main protagonist, Gavin Belson, is a billionaire CEO of Hooli – a rival tech company. In the
most recent season, Belson visits a factory in North Carolina where he desires to build his
company’s flagship product. In a speech delivered to the factory workers and local reporters,
Belson states:

“Being in North Carolina feels like a bit of a homecoming for me. I own a house in
Bermuda, which is off the coast. Technically, it is my primary legal residency.”

Obviously, the program is a comedy and clearly not intended to provide accurate information
about tax law. Nevertheless, Silicon Valley continues the Hollywood tradition of spreading
grandiose falsities about taxes.

Later in the episode, Belson’s assistant informs him that the IRS called regarding Bermuda.

The whole premise is beyond dumb.

America, Eritrea, and Myanmar are the only three countries in the world to impose income tax
based on citizenship rather than residency. Most countries tax citizens and residents only if they are living within its borders.

However, the IRS allows one mechanism for ordinary Americans to significantly reduce their
taxes by moving abroad. Thanks to the Foreign Earned Income Exclusion, Americans can earn
$105,900 of “ordinary income” tax-free.

But Belson is not ordinary – he is a billionaire.

Executive compensation for CEOs is not structured through typical paychecks and “ordinary
income.” Rather, executives are typically paid through stock buybacks, dividends, and other
forms of income that receive capital gains tax treatment.

Even if Belson were to actually live in Bermuda, it wouldn’t change the amount he owes to
Uncle Sam. Thus, claiming residency in Bermuda while actually living in California would be a
historically stupid example of tax fraud.

Belson could greatly reduce his taxes by moving to Puerto Rico and taking advantage of Act 20
and Act 22. The first allows certain qualifying companies to pay just 4% corporate tax rate and
the later allows protected individuals to pay 0% on certain capital gains.

Alternatively, he could expatriate by formally renouncing his US citizenship to benefit from
Bermuda’s tax laws – though he would pay a hefty price up-front.

The IRS has two classifications for expatriates: “covered” and “non-covered.”

“Covered expatriate” is subject to an “exit tax” – a mark-to-market tax on the value of
unrealised gains and deferred compensation items (like IRAs and other retirement plans) which are taxed as ordinary income.

Anyone failing to certify that they’ve been in tax compliance for the five years prior to the
expatriation is a “covered expatriate.” Belson could not truthfully state that he has been in tax
compliance.

Moreover, individuals with a net-worth $2 million USD or more qualify as a “covered
expatriate.” Same goes for people with an average net annual income tax for the last five years of $165,000 USD (adjusted for inflation). There are legal strategies available to individuals near
this threshold to get reclassified as a non covered expatriate and thus avoid the “exit tax.”

As a billionaire, Belson would have no chance of being reclassified.

To expatriate, Belson would incur a massive tax bill by paying capital gains taxes on the mark-
to-market gains of his capital assets like stocks and deferred compensation items. Only then
would he benefit from Bermuda’s zero income tax policy.

Of course, most expatriates do not actually choose to live in Bermuda – which is for tourists and retirees. Rather, they choose places like Dubai where they pay no income taxes while having direct access to its world-class business community.

But why let the truth about tax and wealth structuring get in the way of a good story?

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