What do global investing titan John Templeton, Facebook co-founder Eduardo Saverin and China’s richest man Zong Qinghou all have in common? All three of them have given up their US residency. In fact, last year almost 1,800 US citizens turned in their passports and green cards, a sixfold increase on 2008.
The news has led to debate in the Chinese media about two countervailing trends. In the first, a group of some of the country’s most successful business people – looking to stop paying tax to Uncle Sam – are giving up their US passports. In the second, a larger group of millionaires – claiming concern about the potential for social instability in China or issues like environmental degradation – are looking to emigrate, with many choosing the US as a preferred destination.
As so often the case, it makes for a confused picture of how the business elite sees the country’s prospects.
Exhibit A: Wu, a 31 year-old who asked to be identified only by her family name, and who told Southern Weekend that she now wants to give up her US citizenship.
“I regret it to death, all of my friends regret it to death… I’m never going back,” Wu lamented.
When she first decided to try to become a US citizen, Wu said it was a popular thing to aspire to in China. Her mother was living in the United States temporarily, so Wu went there to study. Once she graduated, she wanted to stay on, so she took out citizenship, becoming the only member of her family to do so.
Wu said she wasn’t worried about having to give up her Chinese citizenship (dual citizenship isn’t legally permissible for Chinese nationals) because having more than one passport is “quite common in China”. Her problems came more in the US, where the regulations were more strictly enforced. Under US law, US citizens and permanent residents, known as green card holders, are taxed on their worldwide income, no matter where they live. That means any US citizen or resident with earnings abroad owes US taxes on income even if the money stays overseas.
It’s not just having to pay taxes on overseas income that’s a problem. Americans and green card holders face onerous reporting requirements, can have trouble opening bank accounts outside the US and might find it hard to form business ventures overseas if potential partners fear getting caught on the IRS radar.
“When I first applied for US citizenship I knew nothing about the legal risks involved,” says Wu regretfully. “If only I had consulted with a lawyer.”
The bad news for Wu is that renouncing citizenship isn’t a straightforward process. Timmas Deng, a Hong Kong lawyer who specialises in immigration, told the South China Morning Post that it can take up to two years to complete the process. Not only is it potentially costly, but the US also requires those giving up citizenship to become a citizen elsewhere (Facebook’s Saverin became a resident of Singapore, for instance).
Despite Wu’s frustrations, the numbers suggest American citizenship is still being sought more than it it is being severed. The number of Chinese applying for green cards is also continuing to climb. In 2011, the US accepted 87,000 permanent residents from China, up from 70,000 the year before.
“A green card is a feeling of safety,” one applicant told the New York Times. “The system here [in China] isn’t stable and you don’t know what’s going to happen next. I want to see how things turn out here over the next few years.”
Where does WiC come down in this debate? Anecdotally, our current experience is that the ‘quitting China’ camp might have the stronger argument. In conversation earlier this year with a Chinese industrialist we were told that both he and many of his friends had immediate or medium-term plans to get their money out of China and emigrate. Rising corruption and increasing political and social tensions were among the reasons given, alongside a fear that China’s economic model wouldn’t be capable of undergoing the necessary reforms.
Of course, this was a single conversation but WiC found it persuasive, given the person in question exemplified the entrepreneurial bedrock of the Chinese business world (he employed several thousand people and had built his firm from scratch over the last two decades).
That said, his preferred destination overseas was not the United States, indicating that he might have read up on America’s fiscal complexities. Possibly he might even agree with the paradoxic posed by Southern Weekend on the Chinese quest to live in America: “A US residency is like a siege: people on the outside want to get in, and people that are inside want to leave.”
© ChinTell Ltd. All rights reserved.
Exclusively sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.