Tax

Vanguard Reaches Tax Settlement With Texas

A whistleblower has alleged the mutual-fund giant charged its funds below-market prices for advisory services to reduce its tax liability.
Matthew HellerNovember 23, 2015

Vanguard Group has agreed to pay back taxes to Texas authorities, the first known payout since a former employee alleged the mutual fund company undercharged its own funds for advisory services.

The payment will be at least $2.5 million, Bloomberg reported, citing documents that showed the Texas comptroller paid former Vanguard tax lawyer David Danon $117,000 for his role as a “confidential informant.” Under Texas law, whistleblowers can receive up to 5% of what is recovered by the state.

Danon has alleged in claims filed with federal and state authorities that Vanguard charged its funds below-market prices for services as a way to reduce its tax liability. Had the world’s largest mutual-fund company charged market rates, it would have brought in more income and paid more in taxes, he said.

Low fees have been Vanguard’s “entire raison d’etre,” Daniel P. Wiener, editor of The Independent Adviser for Vanguard Investors, told Bloomberg.

Vanguard’s mutual funds owe no taxes as long as the bulk of their revenue goes to the funds’ holders. Vanguard Group charges for advisory services its employees provide to Vanguard mutual funds. The funds get those services “at cost,” Danon has alleged, while other mutual funds typically pay higher fees for such services to unrelated advisers.

Vanguard spokesman John Woerth declined to confirm the amount of the payment to Texas but said there was no penalty, and that the payment will not change the expense ratios or performance of its funds.

Vanguard’s discussions with Texas began as part of a routine tax audit, Woerth told Bloomberg. At no time during the discussions with the state’s tax authorities “were we asked to address apparent claims by our former in-house counsel,” he said. “We were unaware of such claims until we learned of the payment in November 2015.”