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Comment: The article below says that Romney's Bain Capital shields
from U.S. taxes $23 billion by using a shell corporation in the Cayman
Islands which consists of one mailbox address. Hedge fund managers
like Romney only pay just a 15 percent capital gains tax now on their
income, income which is called "carried interest" and comprises the
great majority of the hedge fund profits.
(A full description of "carry" is in the following news article:
http://www.washingtonpost.com/
wp-dyn/content/article/2007/08/02/AR2007080202620_pf.html)
Instead of paying incomes taxes, hedge fund billionaires like Romney
make political contributions to buy off politicians so there are no
changes to the tax dodges they use to pay Federal taxes at rates lower
than a single person earning $400 a week (adding in the 7.65 % total
FICA tax to the Federal income tax on that salary).
An argument can be made that much of the profits that hedge funds make
comes not from creating wealth but from using tax avoidance schemes
that encourage investments in these hedge funds. The only remaining
question is how do these hedge fund billionaires avoid paying the real
estate taxes on their expensive homes, they must have a way of not
personally paying those taxes.
----
Island Tax Havens Factor Into Romney's Business Success
Offshore dealings like those of the Republican presidential candidate
trouble many, but they're legal.
By Bob Drogin
Los Angeles Times Staff Writer
December 17, 2007
http://www.latimes.com/news/nationw...c17,0,5730863,print.story?coll=la-home-center
BOSTON -- Second of two parts
-- While in private business, Mitt Romney utilized shell companies in
two offshore tax havens to help eligible investors avoid paying U.S.
taxes, federal and state records show.
Romney gained no personal tax benefit from the legal operations in
Bermuda and the Cayman Islands. But aides to the Republican
presidential hopeful and former colleagues acknowledged that the tax-
friendly jurisdictions helped attract billions of additional
investment dollars to Romney's former company, Bain Capital, and thus
boosted profits for Romney and his partners.
Romney has based his White House bid, in part, on the skills he
learned as co-founder and chief of Bain Capital, one of the nation's
most successful private equity groups. His campaign cites his record
while governor of Massachusetts of closing state tax loopholes; his
involvement with foreign tax havens had not previously come to light.
In the Cayman Islands, Romney was listed as a general partner and
personally invested in BCIP Associates III Cayman, a private equity
fund that is registered at a post office box on Grand Cayman Island
and that indirectly buys equity in U.S. companies. The arrangement
shields foreign investors from U.S. taxes they would pay for investing
in U.S. companies.
Romney still retains an investment in the Cayman fund through a trust.
Campaign disclosure forms show the investment paid him more than $1
million last year in dividends, interest and capital gains.
In Bermuda, Romney served as president and sole shareholder for four
years of Sankaty High Yield Asset Investors Ltd. It funneled money
into Bain Capital's Sankaty family of hedge funds, which invest in
bonds and other debt issued by corporations, as well as bank loans.
Like thousands of similar financial entities, Sankaty maintains no
office or staff in Bermuda. Its only presence consists of a nameplate
at a lawyer's office in downtown Hamilton, capital of the British
island territory.
"It's just a mail drop, essentially," said Marc B. Wolpow, who worked
with Romney for nine years at Bain Capital and who set up Sankaty Ltd.
in October 1997 without ever visiting Bermuda. "There's no one doing
any work down there other than lawyers."
Investing through what's known as a blocker corporation in Bermuda
protects tax-exempt American institutions, such as pension plans,
hospitals and university endowments, from paying a 35% tax on what the
Internal Revenue Service calls "unrelated business income" from
domestic hedge funds that invest in debt, experts say.
Kevin Madden, Romney's campaign spokesman, said there was nothing
improper about the Bermuda arrangement, or in Romney's investment in
the Cayman fund. In neither case, Madden said, did Romney gain the
ability to defer or avoid paying U.S. taxes.
"I would disagree that these could be described as tax loopholes," he
said. "These are perfectly normal and perfectly legal arrangements
that American companies put together to be successful in the market."
The Cayman fund is registered at P.O. Box 908GT on Grand Cayman
Island, corporate records show. Like the Bermuda company, it maintains
no office or staff overseas.
Romney first purchased a 3.25% share of the Cayman fund, and was
listed as a "general partner (passive)" before his retirement from
Bain Capital in late 2001, records show. He put his financial assets
into a blind trust in January 2003, when he took office as
Massachusetts governor.
Brad Malt, who controls Romney's financial trust, said Bain Capital
organized the Cayman fund to attract money from foreign institutional
investors.
"This is not Mitt trying to do something strange," he said. "This is
Bain trying to raise some number of billions from investors around the
world."
The privately held Cayman fund does not disclose its total investment
pool. But Securities and Exchange Commission records show it has
invested through a Delaware partnership in a California-based network
of healthcare centers, a Texas real estate group, a New Jersey
phosphate manufacturer and numerous other companies.
Romney is the wealthiest candidate running for president, with a
personal fortune of up to $250 million, according to financial
disclosure forms he filed in August. His financial trust retains
investments in at least 32 Bain and Sankaty equity, hedge and debt
funds, among other assets, the documents disclosed.
Under his retirement agreement, Romney retains a share of the profits
at Bain Capital, as well as the right to make new investments in Bain
funds through his trust, until February 2009.
Malt said he had repeatedly increased Romney's stake in the Cayman
fund since 2003. He said he was unaware of the specific figures, but
added that he knew he "wrote a lot of checks," and that it paid a
return of 20% to 30% a year.
Malt said he was "pretty confident" that he had invested in additional
offshore funds for Romney since taking over the trust. "I don't care
whether it's the Caymans or Mars, if it's organized in the Netherlands
Antilles or the Jersey Islands," he said. "That means nothing to me.
All I care about is whether it's a good fund or a bad fund. It doesn't
affect his taxes."
Connections with offshore companies became a presidential campaign
issue in April, when the Washington Post reported that Democratic
candidate John Edwards had worked as a paid advisor to the Fortress
Investment Group. Fortress incorporated hedge funds in the Cayman
Islands, allowing its partners and foreign investors to avoid or defer
paying U.S. taxes. The disclosure embarrassed Edwards, who has called
for reducing financial inequalities in America and who had sharply
criticized corporations that utilize offshore tax shelters.
Eugene Steuerle, co-director of the Urban-Brookings Tax Policy Center
at the Urban Institute, a nonpartisan Washington-based think tank,
said he was troubled by the growing use of offshore jurisdictions,
even for legitimate purposes.
"There's clearly something wrong when you have to use post office
boxes to conduct business," he said. "You ideally want a world where
setting up shell corporations wouldn't be necessary."
But offshore companies are now "part and parcel" of America's booming
private equity and hedge fund business, said Kurt Schacht, managing
director of the Centre for Financial Market Integrity at the CFA
Institute, which represents chartered financial accountants, in
Charlottesville, Va. He defended the practice.
"I don't think they're loopholes," he said. "It's not like they're
trying to break the law. It's just taking advantage of what's
available under current tax laws."
As a presidential candidate, Romney regularly touts his successful
business background. But he rarely describes his unusual experience in
the rarefied world of international high finance.
After starting as a management consultant, Romney helped found Bain
Capital in 1984. Initially launched as a venture capital fund to
provide seed money to start-up companies, Bain Capital quickly evolved
into a leveraged-buyout shop. Romney and his partners borrowed money
to buy dozens of troubled companies, and then charged high fees to
revamp management, consolidate operations and, in some cases, lay off
workers. To cash out and pay the underlying debt, they resold the
companies or took them public as quickly as possible.
Romney took a leave of absence from Bain Capital in February 1999 to
take over the scandal-marred 2002 Salt Lake City Winter Olympics. By
then, Bain Capital already had opened its first offshore entities.
According to a report by Fitch IBCA, a major credit-rating service,
Bain Capital managed more than $5.5 billion in assets by mid-1999. The
total included $2 billion managed by Sankaty Advisors, which included
at least two Bermuda-based subsidiaries set up during Romney's tenure.
Public documents do not disclose how much of the $2 billion was
channeled through Bermuda. The Sankaty funds are named for a red-and-
white lighthouse on the Massachusetts island of Nantucket.
Romney legally remained the top executive at Bain Capital during his
leave of absence. On Feb. 20, 2001, a Bain filing to the SEC described
Romney as "sole shareholder, a director and president of Sankaty Ltd.
and thus . . . the controlling person of Sankaty Ltd." The company, it
added, was organized "under the laws of Bermuda."
Today, Bain Capital manages $60 billion in assets, according to a
spokesman. The total includes $23 billion in Sankaty debt and credit
funds. Half a dozen Sankaty affiliates now are active in Bermuda,
corporate registry records show.
The Sankaty debt hedge funds are organized as partnerships in Delaware
that produce taxable business income by investing in fixed-income
bonds and other debt instruments. Under tax law, even tax-exempt U.S.
institutions may face a 35% tax if they invest directly in such hedge
funds. By investing instead through a Bermuda corporation, the taxes
are legally blocked, experts say.
In Congress, both the House Ways and Means Committee and the Senate
Finance Committee held hearings in September that examined whether the
use of such offshore blocker corporations allowed tax-exempt U.S.
organizations to improperly engage in business.
"A lot of people are looking at this," said a Senate investigator, who
asked not to be identified because he was not authorized to deal with
the media. "It grates that these people are only using these offshore
arrangements to avoid paying taxes."
Janne Gallagher, vice president and general counsel of the Council on
Foundations, a nonprofit membership group of 2,100 charities and grant-
making foundations, said the practice was "pretty prevalent" in her
field as portfolio managers sought to spread risk through hedge funds.
"It's a substantial tax, and that's what generally has led people to
invest in these offshore blockers," she said. "I think everyone would
prefer not to if they could avoid the consequence."
Rep. Sander M. Levin (D-Mich.) introduced legislation that would allow
tax-exempt institutions to make such investments without going
offshore. The bill passed the House but has drawn little support in
the Senate.
As governor, Romney helped raise at least $300 million in much-needed
state revenue by closing what he called tax loopholes. Critics called
the strategy a backdoor way to raise taxes, and Romney failed in an
effort to give state officials the authority to penalize corporations
that lowered their tax bills by moving their profits out of state.
As a presidential candidate, Romney calls for lowering the corporate
tax rate, lowering income taxes and eliminating taxes on interest,
dividends and capital gains for those earning less than $200,000. He
does not discuss the use of offshore tax havens on his campaign
website.
bob.drogin@latimes.com
Times staff writer Walter F. Roche in Washington contributed to this
report.
from U.S. taxes $23 billion by using a shell corporation in the Cayman
Islands which consists of one mailbox address. Hedge fund managers
like Romney only pay just a 15 percent capital gains tax now on their
income, income which is called "carried interest" and comprises the
great majority of the hedge fund profits.
(A full description of "carry" is in the following news article:
http://www.washingtonpost.com/
wp-dyn/content/article/2007/08/02/AR2007080202620_pf.html)
Instead of paying incomes taxes, hedge fund billionaires like Romney
make political contributions to buy off politicians so there are no
changes to the tax dodges they use to pay Federal taxes at rates lower
than a single person earning $400 a week (adding in the 7.65 % total
FICA tax to the Federal income tax on that salary).
An argument can be made that much of the profits that hedge funds make
comes not from creating wealth but from using tax avoidance schemes
that encourage investments in these hedge funds. The only remaining
question is how do these hedge fund billionaires avoid paying the real
estate taxes on their expensive homes, they must have a way of not
personally paying those taxes.
----
Island Tax Havens Factor Into Romney's Business Success
Offshore dealings like those of the Republican presidential candidate
trouble many, but they're legal.
By Bob Drogin
Los Angeles Times Staff Writer
December 17, 2007
http://www.latimes.com/news/nationw...c17,0,5730863,print.story?coll=la-home-center
BOSTON -- Second of two parts
-- While in private business, Mitt Romney utilized shell companies in
two offshore tax havens to help eligible investors avoid paying U.S.
taxes, federal and state records show.
Romney gained no personal tax benefit from the legal operations in
Bermuda and the Cayman Islands. But aides to the Republican
presidential hopeful and former colleagues acknowledged that the tax-
friendly jurisdictions helped attract billions of additional
investment dollars to Romney's former company, Bain Capital, and thus
boosted profits for Romney and his partners.
Romney has based his White House bid, in part, on the skills he
learned as co-founder and chief of Bain Capital, one of the nation's
most successful private equity groups. His campaign cites his record
while governor of Massachusetts of closing state tax loopholes; his
involvement with foreign tax havens had not previously come to light.
In the Cayman Islands, Romney was listed as a general partner and
personally invested in BCIP Associates III Cayman, a private equity
fund that is registered at a post office box on Grand Cayman Island
and that indirectly buys equity in U.S. companies. The arrangement
shields foreign investors from U.S. taxes they would pay for investing
in U.S. companies.
Romney still retains an investment in the Cayman fund through a trust.
Campaign disclosure forms show the investment paid him more than $1
million last year in dividends, interest and capital gains.
In Bermuda, Romney served as president and sole shareholder for four
years of Sankaty High Yield Asset Investors Ltd. It funneled money
into Bain Capital's Sankaty family of hedge funds, which invest in
bonds and other debt issued by corporations, as well as bank loans.
Like thousands of similar financial entities, Sankaty maintains no
office or staff in Bermuda. Its only presence consists of a nameplate
at a lawyer's office in downtown Hamilton, capital of the British
island territory.
"It's just a mail drop, essentially," said Marc B. Wolpow, who worked
with Romney for nine years at Bain Capital and who set up Sankaty Ltd.
in October 1997 without ever visiting Bermuda. "There's no one doing
any work down there other than lawyers."
Investing through what's known as a blocker corporation in Bermuda
protects tax-exempt American institutions, such as pension plans,
hospitals and university endowments, from paying a 35% tax on what the
Internal Revenue Service calls "unrelated business income" from
domestic hedge funds that invest in debt, experts say.
Kevin Madden, Romney's campaign spokesman, said there was nothing
improper about the Bermuda arrangement, or in Romney's investment in
the Cayman fund. In neither case, Madden said, did Romney gain the
ability to defer or avoid paying U.S. taxes.
"I would disagree that these could be described as tax loopholes," he
said. "These are perfectly normal and perfectly legal arrangements
that American companies put together to be successful in the market."
The Cayman fund is registered at P.O. Box 908GT on Grand Cayman
Island, corporate records show. Like the Bermuda company, it maintains
no office or staff overseas.
Romney first purchased a 3.25% share of the Cayman fund, and was
listed as a "general partner (passive)" before his retirement from
Bain Capital in late 2001, records show. He put his financial assets
into a blind trust in January 2003, when he took office as
Massachusetts governor.
Brad Malt, who controls Romney's financial trust, said Bain Capital
organized the Cayman fund to attract money from foreign institutional
investors.
"This is not Mitt trying to do something strange," he said. "This is
Bain trying to raise some number of billions from investors around the
world."
The privately held Cayman fund does not disclose its total investment
pool. But Securities and Exchange Commission records show it has
invested through a Delaware partnership in a California-based network
of healthcare centers, a Texas real estate group, a New Jersey
phosphate manufacturer and numerous other companies.
Romney is the wealthiest candidate running for president, with a
personal fortune of up to $250 million, according to financial
disclosure forms he filed in August. His financial trust retains
investments in at least 32 Bain and Sankaty equity, hedge and debt
funds, among other assets, the documents disclosed.
Under his retirement agreement, Romney retains a share of the profits
at Bain Capital, as well as the right to make new investments in Bain
funds through his trust, until February 2009.
Malt said he had repeatedly increased Romney's stake in the Cayman
fund since 2003. He said he was unaware of the specific figures, but
added that he knew he "wrote a lot of checks," and that it paid a
return of 20% to 30% a year.
Malt said he was "pretty confident" that he had invested in additional
offshore funds for Romney since taking over the trust. "I don't care
whether it's the Caymans or Mars, if it's organized in the Netherlands
Antilles or the Jersey Islands," he said. "That means nothing to me.
All I care about is whether it's a good fund or a bad fund. It doesn't
affect his taxes."
Connections with offshore companies became a presidential campaign
issue in April, when the Washington Post reported that Democratic
candidate John Edwards had worked as a paid advisor to the Fortress
Investment Group. Fortress incorporated hedge funds in the Cayman
Islands, allowing its partners and foreign investors to avoid or defer
paying U.S. taxes. The disclosure embarrassed Edwards, who has called
for reducing financial inequalities in America and who had sharply
criticized corporations that utilize offshore tax shelters.
Eugene Steuerle, co-director of the Urban-Brookings Tax Policy Center
at the Urban Institute, a nonpartisan Washington-based think tank,
said he was troubled by the growing use of offshore jurisdictions,
even for legitimate purposes.
"There's clearly something wrong when you have to use post office
boxes to conduct business," he said. "You ideally want a world where
setting up shell corporations wouldn't be necessary."
But offshore companies are now "part and parcel" of America's booming
private equity and hedge fund business, said Kurt Schacht, managing
director of the Centre for Financial Market Integrity at the CFA
Institute, which represents chartered financial accountants, in
Charlottesville, Va. He defended the practice.
"I don't think they're loopholes," he said. "It's not like they're
trying to break the law. It's just taking advantage of what's
available under current tax laws."
As a presidential candidate, Romney regularly touts his successful
business background. But he rarely describes his unusual experience in
the rarefied world of international high finance.
After starting as a management consultant, Romney helped found Bain
Capital in 1984. Initially launched as a venture capital fund to
provide seed money to start-up companies, Bain Capital quickly evolved
into a leveraged-buyout shop. Romney and his partners borrowed money
to buy dozens of troubled companies, and then charged high fees to
revamp management, consolidate operations and, in some cases, lay off
workers. To cash out and pay the underlying debt, they resold the
companies or took them public as quickly as possible.
Romney took a leave of absence from Bain Capital in February 1999 to
take over the scandal-marred 2002 Salt Lake City Winter Olympics. By
then, Bain Capital already had opened its first offshore entities.
According to a report by Fitch IBCA, a major credit-rating service,
Bain Capital managed more than $5.5 billion in assets by mid-1999. The
total included $2 billion managed by Sankaty Advisors, which included
at least two Bermuda-based subsidiaries set up during Romney's tenure.
Public documents do not disclose how much of the $2 billion was
channeled through Bermuda. The Sankaty funds are named for a red-and-
white lighthouse on the Massachusetts island of Nantucket.
Romney legally remained the top executive at Bain Capital during his
leave of absence. On Feb. 20, 2001, a Bain filing to the SEC described
Romney as "sole shareholder, a director and president of Sankaty Ltd.
and thus . . . the controlling person of Sankaty Ltd." The company, it
added, was organized "under the laws of Bermuda."
Today, Bain Capital manages $60 billion in assets, according to a
spokesman. The total includes $23 billion in Sankaty debt and credit
funds. Half a dozen Sankaty affiliates now are active in Bermuda,
corporate registry records show.
The Sankaty debt hedge funds are organized as partnerships in Delaware
that produce taxable business income by investing in fixed-income
bonds and other debt instruments. Under tax law, even tax-exempt U.S.
institutions may face a 35% tax if they invest directly in such hedge
funds. By investing instead through a Bermuda corporation, the taxes
are legally blocked, experts say.
In Congress, both the House Ways and Means Committee and the Senate
Finance Committee held hearings in September that examined whether the
use of such offshore blocker corporations allowed tax-exempt U.S.
organizations to improperly engage in business.
"A lot of people are looking at this," said a Senate investigator, who
asked not to be identified because he was not authorized to deal with
the media. "It grates that these people are only using these offshore
arrangements to avoid paying taxes."
Janne Gallagher, vice president and general counsel of the Council on
Foundations, a nonprofit membership group of 2,100 charities and grant-
making foundations, said the practice was "pretty prevalent" in her
field as portfolio managers sought to spread risk through hedge funds.
"It's a substantial tax, and that's what generally has led people to
invest in these offshore blockers," she said. "I think everyone would
prefer not to if they could avoid the consequence."
Rep. Sander M. Levin (D-Mich.) introduced legislation that would allow
tax-exempt institutions to make such investments without going
offshore. The bill passed the House but has drawn little support in
the Senate.
As governor, Romney helped raise at least $300 million in much-needed
state revenue by closing what he called tax loopholes. Critics called
the strategy a backdoor way to raise taxes, and Romney failed in an
effort to give state officials the authority to penalize corporations
that lowered their tax bills by moving their profits out of state.
As a presidential candidate, Romney calls for lowering the corporate
tax rate, lowering income taxes and eliminating taxes on interest,
dividends and capital gains for those earning less than $200,000. He
does not discuss the use of offshore tax havens on his campaign
website.
bob.drogin@latimes.com
Times staff writer Walter F. Roche in Washington contributed to this
report.
