Did Romney avoid taxes with Swiss bank accounts and Cayman investments?

at 02:30 PM ET, 08/29/2012

(Relevant segment begins at 8:35 mark)

“First of all, there was no reduction, not one dollar of reduction in taxes, by virtue of having an account in Switzerland or a Cayman Islands investment. Those — the dollars of taxes remained exactly the same. There was no tax savings at all. And the conduct of the trustee in making investments was entirely consistent with U.S. law and all the taxes paid were those legally owed and there was no tax savings by virtue of those entities.”

— GOP presidential candidate Mitt Romney during an interview aired Aug. 26, 2012, on “Fox News Sunday”

Republican presidential nominee Mitt Romney has so far released just one year of complete tax returns and an estimate for another year, leaving voters with little idea how much the former Massachusetts governor generally pays in taxes or how he built his fortune. But the few forms he disclosed combined with some leaked documents from Bain Capital, the private equity firm he founded, have provided ammunition to the GOP candidate’s critics, showing that he has Swiss bank accounts and invested in the Cayman Islands.

Opponents have criticized Romney for these financial arrangements, saying he must have something to hide — perhaps tax avoidance — and that a candidate with Swiss bank accounts can’t possibly relate with the average working American.

In an interview that aired over the weekend, “Fox News Sunday” host Chris Wallace pressed Romney on these issues, asking him why he didn’t pull his money from the Swiss banks and the Cayman Island investments when he decided to run for president. Romney said none of that mattered in the context of taxes, because “there was no tax savings by virtue of those entities.”

We examined the financial information available on Romney to determine whether the GOP nominee mislead viewers with his Fox News remarks.

The Facts

Let’s start by taking a look at some of the perks associated with Swiss bank accounts and investments in the Cayman Islands.

One of the main advantages of Swiss banks is that they adhere to a 1934 Swiss law prohibiting banks from providing account information to authorities unless certain conditions apply — such as criminal investigations. These establishments are often associated with organized crime, tax evasion, underground economies and even terrorist networks.

But secrecy is not the only advantage of Switzerland’s financial institutions. “The country has very good, well-run banks,” said James Hines, an international-tax professor at the University of Michigan Law School. “It’s not all cloak and dagger. There are plenty of legitimate reasons to invest money in one of these accounts.”

As for the Cayman Islands, the British territory is known for its friendly tax and regulatory environment, which attracts high-end investment partnerships — available to only the wealthiest investors in many cases. Not all the investors end up avoiding taxes back home, nor are they all trying to. Some just want to get in on the biggest investment game around.

Hines said this could have been the case with Romney. “There’s a totally plausible scenario in which he’s not saving taxes at all,” he said. “Is that what actually happened? I have no idea.”

Many tax-exempt investors use so-called “blocker” corporations based in the Cayman Islands to protect themselves from the Unrelated Business Income Tax (UBIT), a little-known levy that applies to nonprofit entities such as pension funds, charities and university endowments whenever they borrow money to pay for income-generating investments. The idea behind the UBIT is to prevent these tax-advantaged organizations from competing with for-profit businesses without paying taxes.

The UBIT can also apply to individual retirement accounts (IRAs), which are normally tax-deferrable. The experts we spoke with said the government taxes IRA income that comes from an investment fund reporting debt-financed income.

The UBIT does not apply to IRAs and nonprofit groups if their holdings are with offshore investment funds, which is why the offshore blockers became such a popular mechanism. (A memorandum from the legal firm Morgan Lewis explains the UBIT and blocker corporations in greater detail.)

Based on leaked internal documents that The Washington Post detailed in an article last Thursday, we know for sure that Romney’s former private-equity firm, Bain Capital, used blocker corporations to invest in a Japanese electronics company. We also know that Romney invested in those Bain funds, meaning he benefitted at least indirectly from blockers.

What we don’t know for sure is whether Romney personally used a blocker to avoid paying taxes on his IRA, which would lose its tax-deferrable status if he did. The GOP candidate’s remarks on Fox News suggest unequivocally that he did not use such an investment vehicle.

Romney’s cut-and-dry denial on Fox News is interesting because his campaign left itself a lot more wiggle room with an earlier explanation of the candidate’s Cayman investments. In January, the campaign said Romney’s IRA “uses investment structures just as those commonly used by charities and pension funds, including union pension funds, to maintain their tax exempt or tax deferred status.”

This January statement left wide open the possibility that some of Romney’s IRA investments might have been in a blocker entity at some point. His remarks on Fox News, by comparison, represent a flat-out denial.

We can only speculate as to why the campaign hedged on this issue back in January, but Edward Kleinbard, an international tax-law professor at the University of Southern California’s Gould School of Law who has written opinion articles questioning Romney’s tax dealings, expressed serious doubts that Romney did not use blockers to reduce the current tax burdens on himself or his IRA.

Kleinbard added that Romney has “demonstrated a consistent interest in availing himself of every possible tax minimization strategy and it is greatly improbable that he chose to leave money on the table by not using offshore blocker corporations and the like when doing so could save some tax dollars.”

Other tax experts have drawn similar conclusions. Michael Graetz, a tax-law professor at Columbia University and a former assistant to the Treasury secretary during the George H.W. Bush administration, wrote in an opinion piece for the New York Times that “we don’t need any more tax returns to know that Mr. Romney is an Olympic-level athlete at the tax avoidance game. Rich people don’t sent their money to Bermuda or the Cayman Islands for the weather.”

Graetz went on to say that Romney should release more details about his finances, including at least three more years of income-tax returns and documents showing how he valued his transfers to his IRA.

“No one should begrudge Mr. Romney or his family the wealth they have earned,” Graetz wrote. “But if he has not paid the taxes that apply to transfers of such wealth, this should concern us all. After all, who do you think pays for the shortfall?”

In response to questions about Romney’s IRA, the GOP nominee’s campaign said only this: “Gov. Romney’s IRA is tax deferred just like every other American’s. Gov. Romney will pay full taxes when he withdraws the money.”

The Pinocchio Test

An individual with Romney’s wealth and connections has plenty of reason to invest in the Cayman Islands or put his money in Swiss bank accounts. As Hines mentioned, the fact that the former Massachusetts governor has done so does not prove that he avoided taxes.

However, experts agree that blockers are an incredibly common vehicle for investors with holdings in the Caymans, and some doubt that Romney wouldn’t have taken advantage of them to protect himself from taxes on his IRA, especially given his history.

The statements from Romney and his campaign suggest at different times that the former governor might have used blockers to maintain his IRA’s tax-deferrable status and that he positively did not use such an investment vehicle — “there was no reduction, not one dollar of reduction in taxes, by virtue of having an account in Switzerland or a Cayman Islands investment.”

These conflicting statements alone suggest an attempt to shade the facts and mislead voters, even if we don’t have definitive proof that Romney avoided taxes on his IRA. As readers know, we have a “reasonable person” standard when confronted with such uncertainties. The GOP presidential nominee thus earns one Pinocchio for his comments on Fox News — but it could go higher or lower if more information emerges.

Of course, Romney could clear up any confusion and end all speculation about this issue if he released more of his tax returns.

One Pinocchio

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    About the Blogger

    Glenn Kessler has covered foreign policy, economic policy, the White House, Congress, politics, airline safety and Wall Street.

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