WASHINGTON -- Some tax experts are alarmed by Mitt Romney's apparent admission that Bain Capital set up offshore accounts in the Cayman Islands to help wealthy investors avoid paying U.S. taxes.
During an interview with the National Review's Robert Costa, Romney said that offshore sub-companies in the Cayman Islands help foreign investors avoid paying taxes on investments in the United States. Bain Capital currently has 138 such sub-companies headquartered in the Cayman Islands.
"The so-called offshore account in the Cayman Islands, for instance, is an account established by a U.S. firm to allow foreign investors to invest in U.S. enterprises and not be subject to taxes outside of their own jurisdiction," Romney said. "So in many instances, the investments in something of that nature are brought back into the United States. The world of finance is not as simple as some would have you believe. Sometimes a foreign entity is formed to allow foreign investors to invest in the United States, which may well be the case with the entities that Democrats are describing as foreign accounts."
By taxes "outside of their own jurisdiction," Romney is referring to taxes imposed by the U.S. government.
"He's basically admitting here that the Bain funds are set up in the Cayman Islands to help people avoid tax," said Rebecca Wilkins, senior counsel for federal tax policy at Citizens for Tax Justice, a nonprofit tax reform group. "If you want to cheat on your taxes, boy, they're making it really easy."
Since the Cayman Islands do not report information on their investors' accounts to other nations, however, such sub-companies don't merely help foreign investors avoid U.S. taxes, they help investors avoid paying taxes in other nations, as well. The ploy can even help American taxpayers invest in U.S. companies without accruing a tax bill with the IRS. By establishing personal offshore entities, Americans can pose as foreign investors and avoid paying U.S. taxes on investments in American firms.
"Even a U.S. investor pretending to be a foreign investor, by using a Bermuda or Cayman Islands shell entity, can avoid U.S. tax this way," Wilkins told HuffPost. "And we know that's going on. We know that U.S. investors are evading taxes by pretending to be foreigners."
Offshore entities have other, perfectly legal, tax benefits for wealthy Americans.
"There are rules in the internal revenue code on deductions, where you don't incur them, your Caymans entity does, and you can reduce your tax bill," said New York University School of Law professor Daniel Shaviro.
One IRS rule, for instance, prevents taxpayers from taking "miscellaneous" deductions, which can include a host of fees paid to financial advisers, at any amount below 2 percent of their total income. But the tax savings from these deductions can only be recognized when the total fees amount to at least 2 percent of a taxpayer's total income -- and even then, only the amount over 2 percent can be deducted. If 2 percent of a taxpayer's income is $10,000, for instance, at least $10,000 in advisory fees must be accrued in order to be written off, and even then, only the amount over $10,000 can be written off.
But by establishing a Cayman Islands corporation, an individual can charge all of his financial advisory fees to his offshore company, effectively deducting them entirely from his individual tax bill. The Cayman Islands company's money eventually shows up on the individual's tax return -- but only its total profit. Since the financial advisory fees are a cost that reduces the Cayman company's total profit, deductions that would be impermissible for an individual become legal with offshore complexity.
Shaviro agreed that Romney seemed to be implying that Bain had set up offshore accounts to help foreign investors avoid U.S. taxes. Shaviro also noted that more sophisticated financial engineering, including the use of complex derivatives securities, could be used by Cayman entities to further game the U.S. tax code, but noted there is no evidence that Romney has used those.
The Romney campaign was not immediately available for comment.
Ryan Grim contributed reporting to this article.
Ed Conard of Mitt Romney's private equity firm Bain Capital is one of 12 donors who've given at least $1 million to the super PAC Restore Our Future, which supports Romney's bid for the White House. Due to the obliteration of campaign finance law by the Supreme Court, donors can give unlimited amounts to the super PAC. Meet Romney's dozen.
Blake Roney, Nu Skin (Personal Care Products). Gave $1 million as part of a shell corporation.
Steven Lund, Nu Skin. Gave $1 million as part of a shell corporation.
Robert Mercer, left, Renaissance Technologies (Financial)
John Paulson, Paulson & Co. (Financial)
Julian Robertson, Tiger Management (Hedge Fund)
Paul Singer, right, of Elliot Management (Hedge Fund)
Melaleuca and owner Frank VanderSloot (Personal Care)
Paul & Sandra Edgerley
Paul & Sandra Edgerley, Bain Capital
Bob Perry, Perry Homes (Home Builder)
Francis Rooney, Rooney Holdings (Financial)
Oxbow Corp. and William Koch
Oxbow Corp. and owner William Koch (Energy & Technology)