Bain\'s Offshore Tactics Were Lucrative for Romney

Buried deep in the tax returns released by 's presidential campaign are references to dozens of offshore holdings with names like Ursa Funding (Luxembourg) S.à.r.l. and Sankaty Credit Opportunities Investors (Offshore) IV, based in the Cayman Islands.

Mr. Romney, responding to opponents' barbs about his use of overseas tax havens, has offered a narrow defense, saying only that the investments, many made through the firm he founded, , have yielded him “not one dollar of reduction in taxes.”

A review of thousands of pages of financial documents and interviews with tax lawyers found that in some cases, the offshore arrangements enabled his to avoid taxes on its investments and may well have reduced Mr. Romney's personal income tax bills.

But perhaps a more significant impact of Mr. Romney's offshore investments has been on the profit side of the ledger - in the way Bain's tax-avoidance strategies have enhanced his income.

Some of the offshore entities enabled Bain-owned companies to sidestep certain taxes, increasing returns for Mr. Romney and other investors. Others helped Bain attract foreign investors and nonprofit institutions by insulating them from taxes, again augmenting Mr. Romney's bottom line, since he shared in management fees based on the size of each Bain fund.

The documents - which include confidential Bain prospectuses and foreign regulatory filings, many previously unreported - illustrate how these tax-avoidance strategies are woven into the fabric of Bain's deal making. While hardly a novel concept and not unique to Bain, the inevitable result is that elite investors like Mr. Romney are able to increase their fortunes in ways unavailable to most taxpayers.

“Private equity fund managers have a responsibility to their investors to maximize their investors' returns, and part of that responsibility involves minimizing taxes,” said David S. Miller, a tax partner at Cadwalader, Wickersham & Taft.

Many of the details of the Romneys' wealth - estimated at $250 million - remain hidden, partly because Mr. Romney has released only the last two years of his tax returns. Those returns show an effective tax rate of about 14 percent, because most of the earnings came from investments and are taxed at 15 percent, significantly lower than rates on ordinary income.

In a statement, the Romney campaign said, “Governor and Mrs. Romney have scrupulously followed the tax laws and have paid 100 percent of what they owed.”

Mr. Romney ran Bain for 15 years before leaving to manage the 2002 Salt Lake City Olympics. But he has continued to share in the profits of subsequent Bain funds, thanks to the terms of his retirement agreement.

The sophisticated tax strategies of Bain and other private equity firms begin with the basic architecture of their funds. Though headquartered in Boston, Bain and its credit affiliate, Sankaty Advisors, have set up at least 137 entities in the Caymans, using local lawyers and others who provide an islands address for paperwork purposes.

Contrary to veiled assertions by some of Mr. Romney's Democratic foes, hiding assets from the is probably not part of their rationale. Some might still assail the arrangements as “tax dodges.” Others, however, would say they are simply efforts to make Bain's funds more “tax efficient.”

“You can call these loopholes,” Mr. Miller said. “But they're really just inadvertent consequences of an extremely complicated system.”

To navigate that system, Bain said in a statement, “Like virtually all global asset managers, we use widely accepted, fully legal and recognized structures so that investors may receive predictable tax treatment on investment gains for their constituents.”

The reasons for organizing the funds offshore are varied, each based on a specific tax situation, tax lawyers said.

A variety of Bain funds in the Romneys' portfolio have controlling stakes in foreign companies. Had those funds been set up in the United States, the Romneys and other American investors would probably have been subject to certain federal taxes for their ownership of “controlled foreign corporations.” Setting up the funds in the Caymans allowed them to avoid those taxes.