So What About Romney's Offshore Tax Havens?

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So the story-of-the-week seems to be Mitt Romney's off-shore investments.  I am deeply confused by the reporting.  Either that, or the reporters are.


I first saw this story via Sarah Kliff at the Washington Post:

One possibility is that the tax rate might not be the only politically troublesome revelation in Romney's returns. Over at Reuters, Sam Youngman suggests that his work with Bain Capital might have led Romney to shelter income offshore
The Sam Youngman piece does indeed sort of suggest this, but it's more than a bit hazy on how.

His vast fortune is invested in dozens of funds linked to Bain Capital LLC, the powerhouse private equity firm he co-founded and led for 15 years. Several Bain funds have offshore connections and take advantage of tax breaks used only by the U.S. financial elite.

His tax returns could shed light on how Romney and Bain use offshore strategies to avoid taxes, said Daniel Berman, a former U.S. Treasury deputy international tax counsel and now director of tax at Boston University's graduate tax program.

Bain funds in which Romney is invested are scattered from Delaware to the Cayman Islands and Bermuda, Ireland and Hong Kong, according to a Reuters analysis of securities filings.

"Certain interests in foreign investment structures would have to be reported on attachments to his return," Berman said.
All of these things are true, but they do not add up to tax evasion, or even tax avoidance.  Corporations do not have to pay taxes on income unless they repatriate the money.  Individuals, however, do.   The quote sort of muddies the distinction--the returns, we're told, could shed light on how "Romney and Bain" use offshore strategies to avoid taxes, but while I'm certainly not an international tax expert, from what I know, that the phrases "could shed light" and "and Bain" are doing a whole lot of work there.  

As far as I know, there are only a few ways to "shelter" income offshore, and they usually look very much like "sheltering" income onshore--which is to say that we do not tax people on unrealized capital gains.  And for very good reason--just ask all the dotcommers with employee stock options who paid huge taxes to exercise those options, and then saw the value of those options fall to zero.  The IRS didn't give them their money back, either.

The tax expert Youngman consulted implies that this is a very confusing concept:

"I remember as a young lawyer being surprised to see tax returns of very successful investors showing net losses - because they were recognizing net losses" but not yet factoring in unrealized gains, Berman said.
I am sure that Professor Berman is a very smart, knowledgeable man; it is unfortunate that Youngman chose a quote that makes him sound like an idiot.  "Some years, even successful people with a lot of assets lose money" should not be a shocking proposition for anyone old enough to graduate from law school--or read Reuters.  Would you really be surprised to hear that the owner of a California 7-11 had lost money in 2001, even though the building he'd bought in 1981 had appreciated by 70%?

The other way I know of to avoid taxes with an offshore strategy is to invest in a US corporation which doesn't repatriate earnings, and therefore doesn't pay taxes on this.  Any of you who invest in GE, UPS, or Apple are enjoying this sort of tax shelter, and if you sold some of the stock, I suppose it would be technically accurate to say that your tax returns shed light on whether "George and Apple use offshore strategies to avoid taxes", but this would not really be a very interesting statement.  You still have to pay taxes if you want to get your hands on any of the money.

Most of the writing I've seen today about this seems to be confusing the Cayman's role as an offshore tax haven, and its other role as a headquarters for hedge funds.  They are not entirely unrelated, but they are also not the same thing.  Cayman, and a lot of other islands, became tax havens because they wouldn't tell your government if you had money there.  It's not because there is some special tax break for investing there.  

If the investments are showing up on Romney's tax return, then they are definitionally not this sort of tax haven.

Now, the US tax code is very complicated, and I am not an international tax expert, and it's certainly possible that Bain has hit on some structure which allows its investors to enjoy tax-sheltered income while actually having access to it--and that this structure would show up on Romney's return. For all I know, every rich person in the country has a portfolio positively stuffed with such investments.  

But if so, I would like to hear such structures described, not obliquely hinted at.  I know I have some tax experts in my readership, so how about it?

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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