“A company that is set up in the Caymans would not subject their foreign investors to US taxation,” says Seth Cohen, a principal in the accounting firm WeiserMazars in New York.
But Romney is a US investor and must report his income to the IRS, which he apparently has done. “Because he [Romney] is reporting this we know he is obeying the law,” says Mr. Cohen. “If we did not know about his Cayman’s investment that would be a problem.”
However, some other tax experts think Romney may have had a different reason for having money in the Caymans.
While Romney says he paid taxes on his Bain investments, Daniel Shaviro, a professor of taxation at New York University Law School, says Romney may have been trying to avoid paying a specific tax on investments made by his Individual Retirement Account (IRA).
Mr. Shaviro thinks Romney may have invested some of his IRA money in “super high performers.” But Romney wanted to increase his return on investment by getting his IRA to borrow so that he could buy even more of the stocks. However, under IRS rules Shaviro says, nonprofits such as IRAs that borrow to hold investments face something called the Unrelated Business Income Tax (UBIT).
Shaviro hypothesizes that to avoid paying that tax, Romney’s lawyers set up a separate Caymans entity, which would borrow and buy the stocks. Romney’s IRA invested in that entity.
“Congress is sort of aware of this but has not changed the law,” says Shaviro. “It is not a top secret tax planning trick but it is a common end-run around the purpose of the law.”