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Friday, 22 February 2013 09:25

Hedge Fund Billionaires Lower Taxes by Sending Cash on a Bermuda Vacation

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MARK KARLIN, EDITOR OF BUZZFLASH AT TRUTHOUT    bermbeach Billionaire cash goes on vacation to Bermuda
 
In the long list of revealing commentaries BuzzFlash at Truthout has written on the legal and illegal greedy schemes of the rich to get richer – and the failure of the US government to hold them accountable, this is the first time we've ever seen cash sent on vacation to the sun-drenched shores of Bermuda in order to lower tax rates for gluttonous hedge fund millionaires and billionaires.  
 
Bloomberg Businessweek (ironically owned by politician plutocrat and defender of the oligarchy Michael Bloomberg) just reported that "a hedge fund tax dodge uses Bermuda reinsurers" (with a large photo of an idyllic beach above the story, accompanied by the caption "reinsure your taxes away"). But the Bermuda based "reinsurers" are sometimes just little more than mail drops that serve as a vehicle for tax-evasion money laundering, with little concern being expressed by the IRS.
 
The Bloomberg Businessweek article begins with an example of the apparently legal scheme, given the lack of IRS interest in setting limits on such financial profiteering:
 
Last year, about $450 million belonging to top executives at billionaire hedge fund manager John Paulson’s New York firm made a quick round trip to Bermuda. In April the executives sent the money to a reinsurance company called PaCRe they’d set up on the island. By June, PaCRe had sent all the cash back to New York, to be invested in Paulson & Co. funds. By recycling the funds through Bermuda, which doesn’t levy a corporate income tax, the Paulson executives are positioned to exploit a little-known loophole, reducing their personal income taxes and delaying paying the bill for years.
 
At a time when the Obama administration and congressional leaders are calling for a corporate tax overhaul that would eliminate some loopholes, the tax dodge of using reinsurers—which provide coverage for other insurers rather than the general public—is gaining popularity among hedge funds.
 
Referring to three gluttonously wealthy hedge fund managers, Bloomberg Businessweek reveals:
 
The companies set up by Paulson, Cohen, and Loeb are all located within a half-mile of each other in the narrow streets of Hamilton, Bermuda’s capital and the global center of the reinsurance industry. The three put a combined $1.7 billion back into the fund managers’ hands last year.
 
Even the Murdoch-owned tabloid The New York Post jumped on the legalized theft from the public purse of this scheme, putting it a bit more bluntly than Businessweek:
 
Billionaire hedge-fund moguls are getting comfortable with a US tax loophole to fatten their already plump bottom lines.
 
All it takes to avoid tens of millions of dollars in taxes is a short trip to Bermuda — not by them, but their cash.
 
Hedgies like John Paulson and Steve Cohen are forming reinsurance companies in tax-free havens like Bermuda or the Cayman Islands — and then transferring cash from their funds to the reinsurance companies.
 
The cash, classified as insurance company reserves, is then transferred back into the funds as reserves to be invested for future claims.
 
Thanks to an IRS loophole, profits from these insurance companies aren’t taxed — until the stake in the fund is sold, and that could be years down the line.
 
And here’s the kicker: The taxes, when paid, are at the lower capital-gains rate and not as ordinary income.
 
Here’s how Bermuda reinsurance cash can pay off: $100 million of regular cash invested in a fund returning 15 percent annually and taxed at the top rate will result in a $50 million profit after taxes. But the Bermuda cash will produce a profit of $77 million.
 
As for the Internal Revenue Service, like the Department of Justice it seems to have little appetite for investigating the tax-avoidance and financial manipulation schemes of the too-rich to hold accountable titans of Wall Street.
 
As the New York Post concludes: "Generations of investors have used reinsurance as an investment and tax-avoidance tool, but a decade ago the IRS vowed to clamp down on its abuses, with little today to show and no prosecutions."
 
The more the rich get richer, the more they get a free pass from legal oversight.
 
(Photo: sabinaharlac)