Cayman funds spur scrutiny for Romney

January 20, 2012|By Todd Wallack and Beth Healy, Globe Staff

The offshore funds where Mitt Romney has millions of dollars in personal holdings are commonly used by US investment firms to attract foreign money and pension funds, financial industry professionals said yesterday.

The Republican presidential candidate has a portion of his personal wealth invested in funds set up by his former employer, Bain Capital, that are registered in the Cayman Islands. Firms such as Bain frequently set up shop in the Caymans and other tax havens to attract foreign investors who do not want to pay taxes to the United States, or American pension and endowment funds that normally cannot participate in certain types of investments without facing tax penalties, the specialists said.

US investors in such funds, such as Romney, are still required to file tax returns and pay US taxes on the earnings from those investments, according to attorneys who specialize in the area.

“There is a misperception,’’ said Bart Mallon, an attorney with Cole-Frieman & Mallon, a boutique San Francisco law firm that represents hedge funds. “When you say offshore, the American public automatically thinks tax shelter.’’

However, Romney may be avoiding an arcane tax penalty by having some of the investments in his Individual Retirement Account placed in Cayman-registered Bain funds, rather than in similar funds based in the United States, The Wall Street Journal reported yesterday.

Ordinarily, pensions and other tax-favored accounts, such as IRAs, would face a special federal tax, as much as 35 percent, on income received from a US-registered investment that uses borrowed money, or debt, to boost its returns, such as a private equity fund. But offshore funds, such as those in the Caymans, are not subject to the tax.

Romney’s campaign insisted yesterday the former Massachusetts governor and his family paid US taxes on all the income from the Cayman funds.

“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,’’ said Romney campaign spokeswoman Andrea Saul.

However, the Romney campaign declined to provide specific information on his Cayman holdings, such as the number of funds registered there or the total value of those holdings. His most recent financial disclosure forms, from August, list only broad ranges for his individual assets and do not make clear whether the holdings are a US or Cayman version of Bain funds with similar names.

Those disclosure forms do make clear Romney has millions invested in Bain Capital funds that are based in the Cayman Islands. For example, Romney reported an interest in BCIP Trust Associates III in his IRA worth between $5 million and $25 million. Romney retired from Bain in 1999.