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thisisit 7 months ago | hide | past | web | favorite

TLDR: This is click bait. These endowments wouldn't have any tax liability on their investments whatsoever other than because of the manner in which hedge funds are structured.

These endowments are tax-exempt entities. They invest small portions of their money in hedge funds which are traditionally structured as partnerships for US tax purposes. In a partnership, the partners pay taxes directly on the income at the partnership level. That's as opposed to, say, AAPL which is taxed as a corporation. Corporations pay their own taxes, and the shareholders pay taxes on distributions from the corporation. Because of an obscure tax law preventing tax-exempts from engaging in "unrelated businesses", investing in a vehicle that doesn't pay its own taxes (such as a partnership) risks these endowments actually incurring a tax they otherwise shouldn't. Instead, the hedge funds pick an offshore income tax-free jurisdiction (most commonly Cayman) and invest in the hedge fund through a "feeder fund" that is taxed as a corporation and "blocks" the unrelated business income tax. To make it clear: if a US person were to make the same investment, it would generally have a better tax result by investing directly in the partnership than the tax-exempt entities would. This is just a legal mechanism to resolve that unintended consequence.

This is a non-issue, and the people writing about it are either A. Trying to smear the subject of the article B. ignorant.

A single position could easily represent the bulk of what this article reports. The article generalizes this far too broadly.

"Corporations invest tens of millions in offshore tax havens", no shock there.

Given that many universities are either directly or indirectly receiving tax dollars, if they get a bigger return from “tax havens,” then doesn’t that actually benefit the taxpayer since their taxes are going further? If we are worried about taxes not being paid, then it gets circular: universities need money, some of it comes via taxpayers, yet we aren’t happy about them using tax “havens.” Which because of tax havens, they won’t need as much tax revenue since they’re earning a higher return in the tax haven.

Exhausting! So what am I missing here?

Edit: of course universities are tax excempt, so why do we care at all?

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