Table of Contents
For the latest information about developments related to Schedule I (Form 1120-F) and its instructions, such as legislation enacted after they were published, go to www.irs.gov/form1120f.
Schedule I (Form 1120-F) is used to report the amount of interest expense allocable to effectively connected income (“ECI”) and the deductible amount of such allocation for the tax year under section 882(c) and Regulations section 1.882-5. The schedule also identifies the various elections the taxpayer uses, and discloses the basic calculations for the year under Regulations sections 1.882-5(a)(7) and (d)(5), and under the branch profits tax rules of Regulations section 1.884-1(e)(3).
The tax election under Regulations section 1.884-1(e)(3) is not effectuated under the regulations by its identification on Schedule I (Form 1120-F). See the requirements for the time, place and manner for making the branch profits tax liability reduction election under Regulations section 1.884-1(e)(3).
Under Regulations section 1.882-5, the amount of interest expense of a foreign corporation that is allocable under section 882(c) to income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business within the United States is the sum of the interest expense allocable by the foreign corporation under the three-step process set forth in Regulations sections 1.882-5(b), (c), and (d), or (e) and the directly allocated interest expense determined under Regulations section 1.882-5(a)(1)(ii). The interest allocation rules of Regulations section 1.882-5 are the exclusive rules for allocating interest expense under section 882(c) to effectively connected income and for attributing interest expense to business profits of a U.S. permanent establishment under all income tax treaties other than treaties that expressly permit attribution of business profits to a U.S. permanent establishment under application of the OECD Transfer Pricing Guidelines, by analogy. For examples of treaties that expressly provide for such attribution, see Article 7 (Business Profits) and the accompanying Exchange of Notes of the U.S. income tax treaties with the United Kingdom (2004), Japan (2005), Germany (2008), Belgium (2008), Canada (2009), Bulgaria (2009), and Iceland (2009). If the foreign corporation files its tax return using a treaty-based method of the type provided in these treaties, see Treaty-based return positions below for reporting requirements.
All foreign corporations that have interest expense allocable to ECI under section 882(c) must complete Schedule I to report this allocation, regardless of whether the amount allocable under Regulations section 1.882-5 is deductible in the current year, or is otherwise deferred or permanently disallowed under other sections of the Internal Revenue Code (e.g., sections 163(e), 163(j), 263A, 265(a), 267(a)(3)). The information reported on Schedule I is also needed to complete Form 1120-F, Section III (the determination of the branch-level interest tax under section 884(f)). Interest expense that is treated as “branch interest” under Regulations section 1.884-4(b) may be subject to information reporting under section 1461 or section 6049 and potential withholding under sections 1441 and 1442. A foreign corporation that is a reporting corporation and required to file Form 1120-F must complete Schedule I and attach it to Form 1120-F.
See Purpose of Schedule above for examples of treaties that expressly permit interest expense to be determined under rules other than Regulations section 1.882-5.
A foreign corporation is not required to file Schedule I if it (a) does not have a trade or business within the United States, (b) has no worldwide interest expense for the tax year to allocate under Regulations section 1.882-5, or (c) conducts limited activities in the United States for the tax year that it determines do not give rise to effectively connected income, or do not give rise to a U.S. permanent establishment to which business profits are attributable, and the corporation files a protective income tax return under Regulations section 1.882-4(a)(3)(vi).
The Adjusted U.S.-Booked Liability method (“AUSBL”) or Separate Currency Pools (“SCP”) method (item B check boxes);
The adjusted basis or fair market value method for valuing its average assets in Steps 1 and 2 of the computation (line 1 check boxes);
The actual or fixed ratio in Step 2 (line 6 check boxes);
The published 30-day LIBOR election for banks under the AUSBL method in Step 3 (line 10 check box); and
The de minimis foreign currency election under the Separate Currency Pools method in Step 3 (line 16b check box).
Under Regulations section 1.882-5(a)(7), no interest expense allocation elections may be made on an amended return. In addition, the relief for late tax elections provided under the rules of Regulations section 301.9100-1 (and any guidance promulgated thereunder) is not available. An election identified on line 1 of a change from a fair market value method to a previously elected adjusted basis method for reporting U.S. assets is not effective without advance consent of the Commissioner or his delegate. See Regulations section 1.882-5(b)(2)(ii)(A).
Generally, the assets and liabilities required to be reported on Schedule L are the total assets and liabilities reflected on the set or sets of books of the foreign corporation that give rise to income effectively connected with the corporation's trade or business within the United States and to U.S.-booked liabilities (as defined in Regulations section 1.882-5(d)(2).) The total assets and liabilities reflected on such books include the third party U.S. assets (as defined in Regulations section 1.884-1(d)) and third party liabilities (whether with related or unrelated parties), as well as the interbranch assets and liabilities and assets that give rise to noneffectively connected income in whole or in part. Such books reflect the assets of the foreign corporation located in the United States and all other of its assets used in its trade or business within the United States (other than its assets giving rise to effectively connected income under sections 864(c)(6) or (7)), as authorized under Regulations section 1.6012-2(g)(1)(iii). A foreign corporation may instead report its worldwide assets, liabilities, and equity on Schedule L.
If the foreign corporation has more than one set of books and records relating to assets located in the United States or assets used in a trade or business conducted in the United States, it must report the combined amounts on Schedule L and must eliminate asset and liability amounts recorded between these books.
AUSBL method filers complete all columns on lines 1 through 15 and lines 21 through 25. Do not complete lines 16a through 20.
Interest expense that is directly allocable under Regulations section 1.882-5(a)(1)(ii) in accordance with the rules of Temporary Regulations section 1.861-10T(b) or (c) is reported on line 22.
The amount of interest expense allocable to effectively connected income under Regulations section 1.882-5 is the sum of the amount allocated under either the AUSBL or Separate Currency Pools method on line 15 or 20, and the amount directly allocated to ECI and reportable on line 22. The resulting amount allocable and reported on line 23 is also reconciled and reported on Form 1120-F, Section III, Part II, line 7c (branch-level interest tax).
The interest expense allocation reportable on line 23 is determined under Regulations section 1.882-5 before application of other Code sections that defer or disallow the interest deduction in whole or in part. See Regulations section 1.882-5(a)(5).
|More Online Instructions|