http://blogs.wsj.com/washwire/2012/01/19/romney-iras-offshore-investments-helping-his-tax-bill/ January 19, 2012, 10:17 AM Romney IRA’s Offshore Investments:Message 1 of 1 , Jan 19, 2012View Source
Romney IRA’s Offshore Investments: Helping His Tax Bill?
By Mark Maremont
Mitt Romney’s campaign has attacked an ABC News report on the candidate’s offshore investments, saying his holdings in the Cayman Islands and elsewhere have no effect on the amount he pays in U.S. taxes.
But the campaign’s assertions may be wrong or misleading. Tax experts said some of the offshore holdings are likely intended to help Mr. Romney avoid paying an obscure but hefty tax of as much as 35% on some of those investments, held in a tax-deferred retirement account.
As The Wall Street Journal reported in Thursday’s paper, many of Mr. Romney’s offshore investments are held through his individual retirement account, which has grown to between $20.7 million and $101.6 million. IRAs are tax-deferred accounts, in which earnings accrue tax-free until the money is withdrawn during retirement.
Mr. Romney’s IRA has grown so large, it appears, due to investments in various vehicles managed by Bain Capital, the investment fund he helped found in 1984. His latest financial disclosure report, filed in August, shows that many of the IRAs assets are in Bain-affiliated entities located offshore, including one in the Cayman Islands that the report listed as having a value of between $5 million and $25 million.
In response to the ABC News report that focused on investments by Mr. Romney in a “notorious tax haven,” Mr. Romney’s campaign said: “ABC is flat wrong. The Romneys’ investments in funds established in the Cayman Islands are taxed in the very same way they would be if those funds were established in the United States. These are not tax havens and it is false to say so.”
However, tax experts said that had Mr. Romney’s IRA invested in Bain funds in the U.S., he would likely have been forced to pay an obscure levy called the “unrelated business income tax,” also known as UBIT.
This tax, assessed for individuals at a maximum 35% rate, is meant to discourage tax-exempt entities such as an IRA or college endowment fund from unfairly competing with for-profit, taxpaying entities by operating a business without paying taxes on it. Investing in a partnership such as a Bain Capital fund that uses debt to buy companies would trigger the tax, experts said.
For this reason, the experts said, it is very common for private-equity funds such as Bain to set up vehicles in offshore locales such as the Cayman Islands. Such a structure allows American tax-exempt entities, including IRAs, to avoid paying UBIT.
Mr. Romney reported that his IRA, in total, produced income between $1.5 million and $8.5 million from the beginning of 2010 until Aug. 12, 2011.
In response to a question about whether investing in the Cayman Islands entities allowed Mr. Romney to avoid paying the UBIT levy, a campaign aide said late Wednesday: “Governor Romney’s IRA is tax deferred, just like the IRA’s of every other American. Its investments are in compliance with rules created to keep it tax deferred, just like it was intended to be.”
Thursday morning, the same aide added: “There is absolutely nothing misleading here. The ABC story was not about the governor’s IRA.” The aide also said: “The IRS created these special rules to ensure IRA’s could remain tax deferred like they were intended to be. There is no ‘avoidance.’”
Michael Whitty, an estate-planning lawyer at Vedder Price in Chicago, said, “I wouldn’t give (the campaign’s statement about the ABC story) a four-Pinocchio rating, but I wouldn’t say it’s 100% true either.” He said there are some tax differences achieved by having an IRA invest through offshore funds, adding that the strategy doesn’t eliminate taxes owed, but defers them.