Vanguard could be forced to raise fees to cover taxes: plaintiff’s expert

BOSTON Vanguard Group Inc could be forced to raise its fees to cover new tax payments, possibly undercutting a low-cost advantage that has made the company the dominate player in the U.S. mutual fund industry, a tax expert for a plaintiff in a lawsuit said on Friday.

University of Michigan law professor Reuven Avi-Yonah estimated tax authorities could claim Vanguard has an unmet liability of $35 billion from 2007 to 2014. Avi-Yonah has been hired by former Vanguard attorney David Danon who accuses the No. 1 mutual fund company of short-changing U.S. tax authorities by not charging funds the full price of its services.

“The fees would be significantly higher” if Vanguard were forced to start paying more taxes as a result of an unfavorable court ruling, Avi-Yonah told Reuters in a telephone interview on Friday.

In a report this week, Avi-Yonah said authorities could argue Vanguard should have charged its funds fees in the industry average range of around 0.75 percent of assets, giving Vanguard an estimated tax liability of $34.6 billion for the years 2007 to 2014.

Instead expenses for Vanguard funds have been around 0.2 percent of assets, pressuring rivals.

“To the extent that their advantage over Fidelity and others is related to not paying taxes, then some of that advantage will disappear if they have to pay taxes,” Avi-Yonah said.

At the end of August, Vanguard’s fund assets totaled $2.8 trillion, or 20 percent of the market. Boston-based Fidelity was a distant second with 8.9 percent market share, according to Morningstar Inc.

A Vanguard spokesman said the company believes the case is without merit and declined further comment.

The former Vanguard lawyer Danon alleges Vanguard operates “as an illegal tax shelter” by providing services to its mutual funds at prices designed to avoid federal and state taxes, according to a lawsuit filed in 2013 in the New York State Supreme Court, a trial court.

Owned by its funds, Vanguard charges them only the costs of services for buildings and employees, and not for things like profit, according to Danon’s lawsuit. The arrangement breaks requirements that transactions between a corporation and its shareholders occur at market prices, Danon alleges.

Danon also states he was discharged by the company in response to concerns he raised. His attorney, Stephen Sorenson, said Danon also has filed whistleblower claims with the U.S. Securities and Exchange Commission and the U.S. Internal Revenue Service. Representatives for both agencies declined to comment.

(Reporting by Ross Kerber- Editing by Tim McLaughlin and Lisa Shumaker)