Yale was one of more than 100 U.S. universities named in the Paradise Papers for employing offshore vehicles in investments, according to a Nov. 9 article in the Indian Express.
The Indian newspaper published email exchanges between Yale’s assistant general counsel, Stephanie Chan ’97, and Appleby, a Bermuda law firm that assists global corporations and wealthy individuals with their offshore dealings. The newspaper said the emails are included in the Paradise Papers — a collection of millions of leaked loan agreements, financial statements, emails and other paperwork originating from Appleby and other offshore service providers. Transcripts of the emails provided in the article indicate that, in 2013, Yale asked for Appleby’s assistance with investing $100 million with Hong Kong and Mumbai-based firm Steadview Capital Management, through a “Yale-only” entity based in Mauritius.
It is unclear from the emails whether Yale went through with the investment. Still, the allegation appears to add Yale to a list of universities, including Princeton University, Columbia University and Stanford University, among others, revealed to be using offshore vehicles in their investments.
University spokeswoman Eileen O’Connor, told the News that she does not have any knowledge of whether Yale is mentioned in the Paradise Papers or has had dealings with Appleby. Assistant general counsel Chan declined to comment.
Multinational companies and high-net-worth individuals employ law firms like Appleby to set up business entities in offshore jurisdictions with low or no tax to avoid paying high taxes in their home countries. While for-profit organizations stand to benefit more from such tax minimization strategies than nonprofits, both types of organizations are in most cases legally permitted to do so.
According to Yale’s Form 990 for fiscal year 2016, the University has multiple investments domiciled in the Cayman Islands, British Virgin Islands and Mauritius, places known as “tax havens.”
Experts interviewed by the News said that, despite their tax-exempt status, nonprofit organizations sometimes choose to use offshore vehicles in their investments for practical reasons.
Roger Ibbotson, a hedge fund manager and Yale School of Management professor, said the use of offshore vehicles is not a “problem of evading taxes” but has more to do with maintaining confidentiality.
“Things offshore are not as disclosed, and I guess the universities want to be more hidden in their investments,” he said.
He added that universities may be motivated to “go offshore” to prevent competitors from copying their investment strategies.
But Norman Silber, a senior research scholar at Yale Law School and a professor at Hofstra Law School who co-wrote a paper on nonprofit organizations’ use of offshore vehicles in 2015, suggested there is a tax-related reason for universities opting to use offshore vehicles.
According to Silber, although the income of nonprofit organizations is generally tax exempt, universities may face an unrelated business income tax when using borrowed money to invest. The unrelated business income tax is a U.S. tax on any revenue unrelated to the tax-exempt purpose of nonprofit organizations such as universities.
“I would venture to say most universities with sizable endowments will choose to avoid the [unrelated business income tax] by using this kind of device, though this is not the only way,” Silber said.
Silber said that, to avoid the unrelated business income tax, universities may choose to become a shareholder or a limited partner in a corporation created in a low-tax jurisdiction, such as the Bahamas or the Cayman Islands. Under such a system, the investment return is channeled back as a dividend to the shareholder and is not taxed as unrelated business income, he added.
Another motivation for investing through offshore vehicles is to gain access to money managers operating in this way for the sake of private investors who “have a lot at stake” in using vehicles domiciled in jurisdictions with no tax or low tax, according to Silber.
Charles Skorina, an investment executive recruiter who runs a newsletter about university endowments, said it did not surprise him that Yale is mentioned in the Paradise Papers because Yale is a “global investor.”
“They must invest in other countries through offshore vehicles because in many cases they can’t invest and not conflict with local tax laws,” Skorina said.
But despite the legality of using offshore vehicles, some experts voiced concerns about transparency.
“We don’t think there is any sin, if you will, about trying to avoid paying taxes,” Silber said. “We are concerned about transparency and the risk taking by the universities and the financial officers, which is really hard to understand and hard to get to.”
Silber said using offshore vehicles makes it difficult even for universities’ boards of directors to know where endowments are invested.
He cited the example of Northeastern University, which made a name for itself as a progressive voice in climate change reform but was revealed by the Paradise Papers to have made investments in North American oil and gas properties.
“I do think that there is a higher duty owed by publicly supported institutions to make their investments evident. If not to the public generally, certainly make it absolutely clear to stakeholders of the institution,” Silber said.
Yale’s endowment is valued at $27.2 billion as of June 30, 2017.
Jingyi Cui | jingyi.cui@yale.edu