Why does Mitt Romney have money in the Caymans? Two potential reasons.

Mitt Romney’s official residence is Belmont, Mass., a suburb of Boston. But at least a part of his money resides in the Cayman Islands, best known to many Americans as a nice place to escape winter.

Mr. Romney says he reports his income from there and pays his taxes – and will prove it in April or whenever he releases his taxes – assuming he does.

But why was it there in the first place?

The Cayman Islands used to be known as a “tax haven,” a place where people could set up an account with a friendly banker whose lips were sealed. However, tax experts, say in 2009 the Caymans agreed to exchange tax information with at least a dozen IRS-type organizations around the world. Suddenly, it became more difficult to hide assets or income and some banks actually shut down their operations on its sunny shores.

But there could be other reasons to use the Caymans to store millions, other than the discreet bankers.

One of the reasons could relate to Bain Capital, which Romney founded and ran from 1984 to 1999. The company could have been trying to attract foreign investors who did not want to deal with the US tax code. A Cayman Islands-based company could invest in US companies and then move their profits offshore.

“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).

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