BAIN, MITT AND THE 'DUTCH ROUTE'
Presidential candidate Mitt Romney dodges taxes with Private equity fund Bain Capital through the Dutch tax system.
Bain Capital, established by the American presidential candidate Mitt Romney, is one of the most successful private equity funds in the world. Private equity is known for its aggressive methods that do not shy away from using financial wizardy and draconian cost cutting. An essential ingredient for a successful private equity deal is a tax structure that ideally lowers taxation to an absolute minimum. Just like any other self-respecting private equity fund Bain leaves no tax benefit unused. In Bain's web of trust and holding companies you won’t only find the usual suspects - the Cayman Islands, Bermuda, Luxembourg - but the Netherlands is also a link in the fiscal web.
Since 2010 Bain, housed its shares of the the in 2004 acquired Irish pharmaceutical company Warner Chilcott in a Dutch private company. Bain’s filings with the U.S. regulator and Presidential candidate and Bain Capital founder Mitt Romney’s tax returns show Bain Capital and Romney also benefited from the ‘Dutch Route’.
Capital Fund VIII
Bain Capital has already made several successful deals when it establishes its eighth fund in the Cayman Islands in May 2004: the Bain Capital Fund VIII. Bain’s first six funds had already achieved an impressive return of 82 percent, as reported by Bain in a memorandum to potential investors. More than 300 investors, including U.S. pension funds, provided the startup capital of $ 3.5 billion for the Cayman Islands-based fund.
Mitt Romney and his wife were also involved. They did not invest with the regular investors, but with the partners of Bain. Romney had left Bain Capital in 1999 to organize the Salt Lake City Olympic Games. As part of his severance package Romney however, would still benefit from Bain deals until 2009.
The Bain Capital Fund VIII has two forms of 'shares': limited partnership interests and general partnership interests. The limited partners (regular investors) provided almost all of the startup capital. The general partners (Partner of Bain including Romney)share was just $ 3.5 million. But although the partners of Bain provided only 0.1 percent of the capital, they would be entitled to 30 percent of the profit of the fund, that is a large reward even for private equity standards (the standard is 20 percent).
The privilege as a partner of Bain delivered huge returns. Although the partners invested only $ 3.5 million, the profit participation as of September 2010 was worth $ 695 million. A yield of 19.750 percent in six years.
This severance package gave Romney a financial benefit. Taxed at a regular income rate, Americans would pay a 35 % rate. But the rate for capital gains is just 15%. Because his severance package was not rewarded in the form of a salary, but instead as a share of the profit, wealthy Romney pays a lower tax rate than the average American.
In 2004, Bain Capital and a consortium of private equity funds, acquires the Irish pharmaceutical company Warner Chilcott . The consortium establishes an LLC in Bermuda that acquires Warner Chilcott. The cost of the acquisition is over $ 3.15 billion. The consortium provides 1.2 billion and borrows 2 billion. The debt ends up with the Bermudian company and must therefore ultimately, as is usual in private equity, be paid for by Warner Chilcott itself. Bain ends up having a 21.2 percent interest in the Irish producer of vaginal creams (see here) and contraceptives.
The majority of the shares of Warner Chilcott is placed in the Bain Capital Fund VIII. Of the 37.5 million shares Bain had in its possesion in September 2010, more than 25.7 was placed in Capital Fund VIII, according to a quarterly report leaked by tech blog Gawker, earlier this year. Warner Chilcott is a highly successful investment. In September 2010, the market value of the shares stood at $ 576 million, while according to the quarterly report only $ 103 million was paid for the shares.
At the end of 2006, Warner Chilcott goes public again . The IPO is over one billion dollars.The debt is reduced, but Warner Chilcott also pays $ 354 million to the consortium. Shares are redeemed and management fees paid. These are the first revenues for Bain and their partners. The real benefit, however, will come later. Bain is patient.
The Dutch link
In May 2009, following the announcement by President Obama that notorious tax havens such as Bermuda will be tackled, the management of Warner Chilcott announces that it intends to move the company from Bermuda to Ireland. Ireland does not fit in the Cayman Islands, Bermuda, Panama line-up, but nevertheless has an attractive fiscal business climate, which is recognized by the management of Warner Chilcott. " ‘a stable long-term legal and regulatory environment’ and' its robust network of tax treaties ' are some of the reasons used to explain the move by management.
After the big move of Warner Chilcott, Bain Capital changes its structure in August 2010.
The Warner Chilcott shares were then moved to a dutch LLC. Alter Domus, a company that provides “Administrative services for multinational companies and alternative investment groups, provides the managers.
The Netherlands is chosen as the location because of its tax specialty: the participation exemption. If a a Dutch company owns more than five percent of the shares in another company, no taxes have to be paid on all income derived from those shares (dividends or profits on the sale of the equity interest). Combined with our extensive network of tax treaties, this has the potential for large tax benefits. 'The Netherlands is the world champion in participation exemption, " according to Jos Peters a fiscal advisor with Merlyn Consultancy.
If Warner Chilcott were to pay immediate dividends to the Bain partnership in the Cayman Islands, 20 percent withholding tax would be levied in Ireland. However, if dividends are paid to a Dutch company in Ireland, one is exempt from withholding tax. Because of the the participation exemption, no taxes are levied on dividend in the Netherlands. That tax free dividend is moved via Luxembourg to the sunny, untaxed beaches of the Cayman Islands. The same applies to capital gains made on shares - buy for ten, sell for twenty - which also remains tax free through the participation exemption, thanks to Irish-Dutch treaties and EU directives.
Most of the profit associated with the acquisition of Warner Chilcott has been made in the past two years. A month after Bain moved its shares to the Netherlands, Warner Chilcott announced a special dividend of $8.50 per share. To pay for this extensive benefit totaling $ 2.15 billion, Warner Chilcott goes back into debt for the amount of $ 2.25. A similar benefit is awarded two years later. In September 2012 again Warner Chilcott pays a special dividend of $4 per share (cost $ 1 billion) and Warner Chilcott again has to borrow $ 600 million. One week after the last payments, Bain and their private equity partners sells about half of their shares in Warner Chilcott.
Bain gained 389 million dollars in dividends since 2010 (and Warner Chilcott 2.85 billion in debt). Bain has through the 'Holland route " saved at least 77 million in Irish dividend withholding taxes confirms Jos Peters who also advises major private equity funds. Since the shares of Warner Chilcott are located in the Netherlands, Bain also sold $ 334 million of shares. "Bain saved a lot of Irish capital gains taxes when the shares were sold," said Peters.
Romney and Warner Chilcott
How much Romney and his wife have invested in Bain Capital Fund VIII is unknown.In 2006, their shares were worth at least 'over one million' according to the ‘public financial disclosure report’ that Romney deposited with the American electoral college for his 2008 campaign. That value has only increased since that time. The tax returns of Romney and his wife showed that they received a total of $ 2,050,000 in divdends in 2010 and 2011. Their shares in the fund in that same period, increased in value by more than 5.5 million.
Romney receives at least a portion of the profit in shares. On March 10 2011 Romney gives 19,799 shares of Warner Chilcott (worth about $ 450,000) to a non-profit belonging to his son, The Tyler Foundation. That same day Bain Capital reports to the U.S. regulator that it transferred shares to its partners for “charitable donations”. Because he donates his shares to a charity, Romney doesn’t have to pay capital gains taxes in the US for these shares. Moreover, Romney's charitable donations are tax deductible.
The Tyler Foundation, the charity of Romney's son, had $ 10 million in assets in 2010. The largest donations made by the foundation, have been made to the Mormon church. ( Romney as a Mormon has an informal obligation to donate 10 percent of his income to the church.) A close second was Brigham Young University, Romney's old university, but also the George W. Bush Library scores high with a donation of $ 100,000 in 2010.
Curiously, Romney failed to deduct his donation to The Tyler Foundation from his taxes. The reason according to Brad Malt, the trustee of his assets, was that in August 2012 Romney claimed he never payed less than 13 percent in taxes. If Romney had deducted this, he would have payed less than the 13 percent . Romney doesn’t have anything to worry about., He has 3 years to correct his 2011 tax return for 2011.