In our last entry, we talked about how Fact Checkers often erroneously repeat “conventional wisdom” as truth. So it’s only fair that when a Fact Checker starts down the right path, it is recognized.
The Washington Post’s The Fact Checker column did an admirable job researching and discussing the Unrelated Business Income Tax (UBIT) and “blocker” corporations in a post by Josh Hicks. Hicks recognized that many US based charitable endowments and pension funds use international investments to avoid the UBIT on debt-financed investments. He also correctly stated that individual retirement accounts (IRAs) are subject to UBIT, and thus may use the same “blocker” structure to avoid this tax.
Blockers are simply a corporation that receives investment proceeds, thus characterizing income to investors as dividends. Because dividends are not taxable to tax exempt entities like pension and endowment funds, no UBIT tax is due. By establishing a blocker corporation offshore, no current US tax is due on the profits from a corporation’s business either.
Hicks should have gone on, however, to note that an IRA is a like a pension fund – both are retirement investment vehicles. So if Mitt Romney invested in an international investment fund that had a blocker structure, he was merely using for his own IRA what millions of middle – class workers already have for their pension. Rather than doing something that only the wealthy can take advantage of, he was putting his IRA on equal footing with autoworkers and university professors with pensions.
Some will be quick to say that this structure is a “loophole” or tax evasion. They should keep in mind that the US Congress has been aware of this structure for years, and has kept it. That’s because it benefits average workers with pensions and helps fund university endowments. Plus, like millions of other Americans, Romney will have to pay tax on money he withdraws from his IRA during retirement.
Rather than mistakenly vilify Cayman as a tax haven, an informed fact checker would note that with its network of regulator to regulator cooperation agreements and tax information agreements and its long standing record of cooperating with US authorities, there is no better place than Cayman for structuring inward investments to the US.