Jane Street may face higher tax after probe into offshore control

Last month, Sebi issued an interim order holding Jane Street guilty of market manipulation.

The income-tax (I-T) department is examining whether global proprietary trading firm Jane Street has violated India’s Place of Effective Management (POEM) rules, two people with direct knowledge of the matter have told Moneycontrol.

These rules were introduced in 2015 to determine the true location from where a company is managed and controlled. If an Indian-registered company is effectively managed from abroad, it can be taxed at a significantly higher rate.

The tax framework distinguishes between domestic and foreign-controlled entities. While domestic companies benefit from a corporate tax rate of 25.17 percent, foreign companies or foreign-owned and controlled companies (FOCCs) are taxed at 35 percent.

POEM was brought in to prevent multinational firms from artificially lowering their tax burden by setting up Indian subsidiaries that are, in effect, controlled from overseas.

The latest probe into Jane Street comes after a recent order by the Securities and Exchange Board of India (SEBI) found that the firm’s ultimate control lies in Europe and the United States.

Following this, the I-T department surveyed Nuvama Wealth Management on July 31. Nuvama acts as custodian for Jane Street’s Singapore-based entity. During the survey, officials seized documents related to Jane Street’s ownership structure and decision-making authority, the sources said.

“The I-T department is trying to establish whether the Indian arm is being controlled from overseas, with real decision-making power resting with the foreign parent of the trader,” one of the persons cited above said.

Emails sent to Jane Street, Nuvama Wealth, and the I-T department remained unanswered.

The company, however, may be compliant with General Anti Avoidance Rules (GAAR) since it has physical presence in India. Further, the Indian entity pays 10-20 percent tax on derivate trades compared to the Singapore entity of Jane Street, which pays zero tax on derivatives due to India-Singapore tax treaty, the source said.

While both GAAR and POEM deal with tax avoidance arrangements, there provisions are different.

GAAR primarily targets companies that route investments through tax havens to avoid capital gains or royalty taxes. POEM deals with corporate tax and tests whether control is being exercised from abroad even if the legal registration is in India.

Also read: Jane Street not cooperating with Income Tax Dept probe, servers and books located overseas

If tax authorities conclude that Jane Street India should have been classified as a foreign-controlled company, it may be liable for retrospective taxes along with penalties and interest.

“After POEM was introduced, many MNCs revisited their structures to ensure compliance,” said a second person. “Tax litigation can be costly — both in financial and reputational terms.”

POEM is part of India’s alignment with international tax norms set by the Organisation for Economic Co-operation and Development (OECD) to curb base erosion and profit shifting.

Globally, several large corporations, especially in the tech and financial sectors, have faced scrutiny for using low-tax jurisdictions while retaining control from their home countries.