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Romney, Shell Companies & Offshore Accounts: A Primer

Romney, Shell Companies & Offshore Accounts: A Primer

By Erin McPike - July 16, 2012


It's no secret that Mitt Romney is wealthy. But recent reports about where he has invested his fortune have sparked a debate about the appropriateness of a presidential candidate engaging in tax deferral practices.

This conversation is a welcome one for the Obama campaign, which has repeatedly portrayed Romney as being out of touch with average Americans. Steering the political discourse to offshore banking accounts is yet another way to bolster that critique.

The Obama team is also using Romney’s investments to underscore a broader point about tax policy. The presumptive GOP nominee could explain that he sought lower taxes outside the country to drive his own campaign message about slashing the tax rate, but he has thus far eschewed that tactic -- an understandable response given his reticence to discuss his personal finances.

To explore the larger issues here further, we first need to explain what Romney did with his vast investments. Recent articles in Vanity Fair and the Associated Press have charted the flow of some of his dollars into shell companies and offshore investments. Most Americans don’t have the kind of resources Romney does -- either in scope or in type -- and thus even the terminology involved might be puzzling.

But as investment banker James Rickards explained to RCP, “This is 98 percent tax-driven.”

Calling it ironic that Romney famously said, “Corporations are people,” Rickards noted that “there’s a difference between Mitt Romney the person and his corporations.” He pointed out that “corporations have a separate existence. If you have an overseas investment . . . in Bermuda, that entity is not a U.S. taxpayer. The money it makes is not U.S. income, so it’s not taxable in the United States.”

Indeed, according to Vanity Fair and the AP, Romney initiated a “company” in Bermuda called Sankaty High Yield Asset Investors Ltd., in which he could park money he made from overseas investments in order to shield it from the high U.S. tax rate.

If a person makes money abroad, “you would not put that money in a high-tax jurisdiction” such as the United States, Rickards explained. Instead, someone with foreign investments could launch what is known as a shell company to delay, and possibly minimize, paying taxes.

This practice is “quite common,” he said, among the wealthy members of the financial sector who are involved with hedge funds, private equity firms, the insurance industry and other Wall Street entities. But it is, of course, not common among Americans whose income derives from domestic sources, because that income cannot legally be moved into shells.

For, say, teachers, firefighters, secretaries, office managers, marketing consultants, journalists, and all kinds of other American workers, income is usually limited to funds derived within the United States. That money cannot be used to launch a “company” in Bermuda because it didn’t come from a foreign source. If someone tried, they would violate U.S. laws.

Enter into this discussion President Obama’s chief strategist, David Axelrod. On CNN’s “State of the Union” Sunday morning, he criticized Romney’s personal finances:

Tens of millions of dollars in the Cayman Islands. So when we reform the tax code . . . how does that inform his judgment? . . . What I am suggesting is that he's taken advantage of every single conceivable tax shelter and loophole that we can see. And now, is he the guy who is going to clean up our tax code and make it advantageous to average taxpayers in the country, or is he going to look at it through the lens of his own experience?

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Erin McPike is a national political reporter for RealClearPolitics. She can be reached at emcpike@realclearpolitics.com. Follow her on Twitter @ErinMcPike.

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