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 context of B2B it's not at all odd, you're right. (In fact, that's the whole reason transfer pricing rules exist.)
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.)
Depending on structure, co-ops often do face special tax reporting requirements.
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.
Honest question: if the California subsidiary is able to provide those services at the set fees (i.e. pay salaries, etc.), how can it be considered "below market price"? Is it required by law to make a profit?
It's fairly nuanced and there are different standards used, but one key one is arm's length pricing. You need to charge what you would charge an arm's length customer (ie. market price).
Another standard does, in fact, set a minimum level of transactional profit based on comparable businesses. [0]
No, because it isn't the investors who avoided paying taxes. If they had been expensed at market rate, their return (and therefore tax burden) would have been lower, not higher.
That being said, in principle it's all mostly the same since investors own Vanguard.
What? I fully read the article and also Matt Levine's take. [0]
I'm well aware what a mutual fund is and, for the record, think this case is pretty stupid and unlikely to be won. But it's important to understand that there actually are tax principles in play here.
Have you heard of transfer pricing? I suggest reading anything.
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.