"They charged less than their competition. That's potential tax revenue lost. They are therefore thieves." is the dumbest argument I've ever heard.
How is this even an issue, let alone the basis for a legal case?
How is this even an issue, let alone the basis for a legal case?
It's a lot less crazy than it sounds, because they are wholly owned by Vanguard. So the customer is effectively setting the fees.
There are certainly scenarios where you could see how this is clearly abusive. As a contrived example, imagine if Apple moved its legal headquarters to Ireland and made California into a subsidiary. They would still have to pay the California subsidiary for the design services it provides, but they could set those fees at way below market price and thereby shift all tax liabilities to a lower tax jurisdiction. We have transfer pricing rules in place to prevent this.
The situation is more complicated than this because the fund (the client) is not a profit-seeking corporation, so it's not arbitrarily moving funds around. It's an odd scenario where the customers are also the owners.
In the current era, it is however uncommon for consumers to simultaneously own and (exclusively) be the customers of a company. (Historically, that is of course the entire principle of mutual funds.)
Moreover, in this case the fact that Vanguard is a co-op is a redeeming factor. If it were a typical corporation charging itself below-market transfer prices, that would likely be illegal.
Another standard does, in fact, set a minimum level of transactional profit based on comparable businesses. [0]
[0] https://en.wikipedia.org/wiki/Transfer_pricing#Comparable_pr...
That being said, in principle it's all mostly the same since investors own Vanguard.
You can see why that sort of thing would be illegal and that kind of subsidiary would be legally required to charge the market rate for the services they were providing.
Forgone fees go to the fund's investers, who are also its owners. And capital gains by investers are taxed, just as they are for other funds. Maybe they're taxed at lower rates than profits of other funds are taxed. But that's just because the fund manager is a not-for-profit.
Right?
Of course, that doesn't mean it can't rebate the profit back to the funds which could then apply it as a fee rebate. That should be totally legal, as long as it pays taxes on the profit before it issues the rebate.
This whole territory has been explored before, by the way. Mutual insurance companies used to have this same problem, and eventually Congress just added another carveout to 501(c) and made the problem go away. That's the other alternative here, and it's definitely cleaner and probably better for society as a whole.
It's asset-weighted fees are approximately 1/6 of its competition. That seems pretty competitive to me.
Less bombastically, who decides what a competitive fee is? If they charged 1/2 market rate would this suit have ever been filed?
If they were operating at a loss I think it'd be pretty easy to claim they were avoiding taxes and should be operating at break even. But they are operating at break even, so I think it's hard to make the argument that they should be charging more "just because other firms do" and not come off as just some opportunist trying to cash in on a whistle-blower payout.
That being said, I sort of see how a legalistic argument could be made.
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To be clear, I do think this should be legal and kosher. But I sort of see how the argument could be made.
How, and when you can engage in such activity I'll lead to tax attorneys, but it's not a no-brainer "You should always be able to charge lower fees and transfer profits away from one entity to another." There is some nuance.