Vanguard Group Inc. has reached an agreement to pay several million dollars in back taxes in Texas, the first known payout related to a whistle-blower’s accusation that the world’s biggest mutual-fund company underpaid its taxes by tens of billions of dollars.
The Texas action came after a former Vanguard tax lawyer alleged that the company provided services to its mutual funds at below the going price. Had the company charged its own funds at market rates, it would have brought in more income and paid more in taxes, the lawyer says. He’s made these allegations in claims filed with the Internal Revenue Service and the Securities and Exchange Commission, as well as with tax authorities in Texas and California.
The allegations run counter to those that have been levied against some mutual funds and private equity firms -- which have been accused of overpaying consultants at related companies, at investors’ expense.
Low fees have been Vanguard’s “entire raison d’etre,” said Daniel P. Wiener, editor of The Independent Adviser for Vanguard Investors. Generally, if the company is compelled to make larger tax payments -- a big “if,” he said -- it could be forced to raise expense ratios. That would be “a huge marketing black eye,” he said.
$3.4 Trillion
The privately held Malvern, Pennsylvania, company, with $3.4 trillion in assets around the globe, resolved its Texas tax liability without any penalty, said John S. Woerth, a spokesman. He declined to say how much the company paid.
Any speculation that Vanguard’s fees could change -- based on a presumption that Vanguard may have to pay other taxes, and that any such taxes would have a material impact on its fund costs -- is “suspect and speculative,” Woerth said, adding that the company remains “confident in our approach to paying the fair and appropriate amount of taxes.”
David Danon, who served as an attorney in Vanguard’s tax department from 2008 to 2013, claimed that the company should have reported “hundreds of millions of dollars of income” subject to Texas state tax. He filed his submission with the Texas Comptroller of Public Accounts in December 2013.
‘Confidential Informant’
Earlier this month, the Texas comptroller paid Danon about $117,000 for his role as a “confidential informant,” according to documents reviewed by Bloomberg News.