Table of Contents
- Part I – Home Office Deductible Expenses Definitely Related Solely to ECI or Non-ECI
- Part II – Home Office Deductible Expenses Allocated and Apportioned to ECI
- Part III – Allocation and Apportionment Methods and Financial Records Used to Complete Parts I and II
- Part IV – Allocation and Apportionment of Expenses on Books and Records Used to Prepare Form 1120-F, Schedule L
Part I is used to identify the total expenses, including interest expense and bad debt expense, recorded on the corporation's home office books; to report adjustments made to determine the amounts that are deductible for U.S. tax purposes; and to report the portion of the adjusted expenses that are definitely related to ECI and non-ECI. To the extent included in the home office records used to report total home office expenses, interest expense and bad debt expense are also identified on Schedule H and removed from expenses allocated and apportioned under Regulations sections 1.861-8 and 1.861-17 and Temporary Regulations section 1.861-8T. Deductions reported on home office books may include expenses incurred outside the foreign corporation's home country (other than in the United States). Home office deductions do not include deductions that are reported on books and records used to complete Form 1120-F, Schedule L (“Schedule L books”). Schedule L books are the set or sets of books of the corporation's U.S. trade or business or books of its U.S. branch (whether maintained within or outside the United States) as defined in Regulations section 1.882-5(d)(2).
Part I may be completed in U.S. dollars or in the foreign corporation's functional currency. If the corporation completes Part I in U.S. dollars, check the box in the Part I heading. If the corporation completes Part I in its foreign functional currency, specify the currency in the space provided in the Part I heading.
Expenses included on line 1a of entities whose expenses are not includible in the corporation's expenses for U.S. tax purposes.
Temporary differences (e.g., costs capitalized under section 263A, carrying charges under section 263(g), depreciation and amortization, general loan loss reserves).
Permanent differences (e.g., interbranch transactions other than interest, non-deductible meals and entertainment and executive salary compensation).
Enter on line 8 deductions included on line 7 that are definitely related to non-ECI received from subsidiaries (other than disregarded entities whose income and deductions are treated as income and deductions of the corporation filing Form 1120-F). See, for example, Regulations section 1.861-8(e)(4)(ii) and Regulations section 1.861-17 (relating to treatment of stewardship expenses attributable to dividends and research and experimentation expenses).
Enter on line 9 deductions included on line 7 (other than amounts included on line 8) that are definitely related under Regulations sections 1.861-8 and 1.861-17 and Temporary Regulations section 1.861-8T to non-ECI of the corporation that is booked in the corporation's home office and in other locations in the corporation's home country. For example, line 9 includes deductions included on line 7 that are definitely related to non-ECI of a banking corporation that is booked in the corporation's home office and in its retail banking branches in the corporation's home country. The amount of any inter-office or interbranch charges from the home office to various locations and departments recorded on the home office books as home office “service” fees for internal management or home office tax accounting purposes (which amounts are eliminated on line 2) is not determinative of the amount of the home office's deductible expense that is definitely related to non-ECI.
Enter on line 10 all other deductions included on line 7 that are definitely related solely to non-ECI of the corporation (other than amounts included on lines 8 and 9). For example, if a banking corporation conducts global banking operations through branch offices (including through disregarded entities) in locations outside the corporation's home country, the home office deductions included on line 7 that are definitely related to non-ECI booked in those locations are reportable on line 10. These deductions include home office deductions definitely related to non-ECI of disregarded entities, whether or not the balance sheet from such entity is reportable on Schedule L of Form 1120-F. (For corporations other than banks, such non-ECI may be reflected as income from includible entities on Schedule M-3 (Form 1120-F), Part I, line 5. Foreign banks record such non-ECI on Schedule M-3 (Form 1120-F), Part I, line 5 only if the entity's sets of books are reportable on Form 1120-F, Schedule L.) See the Instructions for Schedule M-3 (Form 1120-F), Part I.
You must round the result to more than five places if failure to do so would materially distort the exchange rate or the equivalent amount of U.S. dollars.
Part III is used to identify the income, asset, and personnel attributes of the U.S. trade or business and to report the methodologies and financial records used to determine the amount of the deductions that are allocated and apportioned to ECI in Parts I and II of Schedule H. The corporation's ratios of effectively connected gross income, U.S. assets, and U.S. personnel to worldwide gross income, worldwide assets, and worldwide personnel are reported on lines 21 through 23. Other ratio-based methods and any non-ratio-based methods the corporation used for the tax year to allocate and apportion deductions to non-ECI on lines 8 through 10 and to ECI on lines 11, 16, and 19 are identified in statements required by the instructions for lines 24 and 25.
The corporation must complete the gross income ratio for line 21 whether or not it used such method to allocate and apportion deductions in Parts I and II. If the corporation used the asset or number of personnel method (whether separately or as components of a multi-factor method), it must report the attributes on lines 22 and 23. If the corporation did not use either the asset or the personnel method to allocate and apportion deductions for the year, then, except as provided for worldwide assets reported on line 22b, only the numerators of each method must be reported on lines 22 and 23. See the instructions for line 22b for disclosure of the asset ratio by corporations that used the actual ratio to allocate interest expense under Regulations section 1.882-5.
Check the “Yes” or “No” box to indicate whether the types of financial books and records indicated were used to complete Parts I and II of Schedule H.
Use Part IV of Schedule H to report the allocation and apportionment of deductions recorded on the corporation's Schedule L books, other than interest and bad debt expense, to ECI and non-ECI under Regulations sections 1.861-8 and 1.861-17 and Temporary Regulations section 1.861-8T.
The Schedule L books may be maintained using GAAP, or other applicable accounting standards, other than U.S. GAAP. The Schedule L books may include more than one set of books, including the set(s) of books of disregarded entities. See the instructions for Schedule M-3 (Form 1120-F), Part I, lines 4 and 5, for the Schedule L treatment of disregarded entities and the combined reporting of multiple sets of books. These rules apply to both banks and non-banks for purposes of determining the expenses reportable on Schedule H, line 29. Interbranch income and expenses recorded between separate sets of books must be eliminated in the combined reports.
Amounts paid or accrued on the Schedule L books to the home office are not determinative of the amount of home office expense allocated and apportioned to ECI on Schedule H, Part II, line 20.
The amount of deductions reported on line 37 that is allocated and apportioned to ECI and non-ECI is reported on lines 38a through 41, columns (a) through (c). With respect to each of lines 38a through 41, enter the amount included in line 37 that is allocated or apportioned to ECI in column (a) and the amount allocated or apportioned to non-ECI in column (b). Add columns (a) and (b) for each line and enter the total amount in column (c).
Periodic expenses from notional principal contracts may be allocated and apportioned to ECI and non-ECI in accordance with the ECI and non-ECI treatment of the item(s) the notional principal contract hedges.
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