BILL ANALYSIS Ó
AB 2490
Page 1
Date of Hearing: May 25, 2016
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Lorena Gonzalez, Chair
AB
2490 (Gatto) - As Amended May 16, 2016
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|Policy |Revenue and Taxation |Vote:|9 - 0 |
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Urgency: No State Mandated Local Program: NoReimbursable: No
SUMMARY:
This bill, until January 1, 2022, exempts a mutual fund
investment management company that is wholly owned by one or
more regulated investment (RICs) companies from the Corporation
Tax (CT) if it provides management services to the one or more
regulated investment companies "at cost."
FISCAL EFFECT:
Unknown fiscal costs. Due to privacy concerns for the affected
taxpayers, data that would allow revenue estimates are not
AB 2490
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publically available.
COMMENTS:
1)Purpose. AB 2490 aims to codify existing practices regarding
how Vanguard is currently taxed and to protect the company,
and its customers, from a pending lawsuit that could result in
increased fees.
2)Regulated investment companies and mutual funds. A RIC, such
as an eligible mutual fund, can pass the taxes on capital
gains, dividends or interest earned on fund investments,
directly to clients or individual investors. A RIC is
qualified under Regulation M of the Internal Revenue Service
(IRS) to pass taxes onto investors to be taxed at the
individual level.
Mutual funds are companies that pool money from many investors
and invest these funds in securities such as stocks, bonds and
short-term debt. To the extent these mutual funds are
qualified RICs meeting all of the applicable requirements,
they are not subject to either federal or state income tax.
The mutual fund manager, however, if organized as a "C"
corporation, is subject to both state and federal taxes on the
profits earned at the entity level.
3)The Vanguard structure and whistleblower. Vanguard is
structured differently than many other mutual funds. Most
mutual funds are sold by an investment company, which is
created to make a profit for its shareholders. In contrast,
Vanguard is a "mutual ownership" company, where the investment
manager, Vanguard, is owned by the funds. Since 1975, Vanguard
AB 2490
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has charged its domestic funds only the "costs" of providing
services, such as investment management and advisory services.
This structure has also allowed Vanguard to offer the lowest
fees in the industry.
In 2015, a whistleblower alleged that Vanguard should have
paid taxes on profits it never charged, but should have
charged, fund investors. The whistleblower has argued that
Vanguard is bound by state and federal law that requires
transactions between affiliated companies to be paid at "arm's
length" prices, which is generally meant to be the prices paid
by unrelated parties. Both the IRS and the FTB are
investigating the claim.
Analysis Prepared by:Luke Reidenbach / APPR. / (916)
319-2081