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. 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.
A reporting corporation is any foreign corporation that is engaged in a trade or business or treated as engaged in
a trade or business within the United States directly or indirectly at any time during the tax year.
Treaty-based return positions.
If the corporation determines its interest expense attributable to its business profits of a U.S. permanent establishment
pursuant to the express provisions and accompanying documents of an applicable treaty, then Schedule I still must be completed
based on the treaty method used (substituting the amount of assets, liabilities and interest expense determined under the
treaty method for the amounts that would have been reported under Regulations section 1.882-5) and attached to Form 1120-F.
The corporation is also required to complete and attach Form 8833, Treaty-Based Return Position Disclosure.
Exceptions from Filing Schedule I
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).
Protective elections on protective returns.
A corporation that files a protective tax return on Form 1120-F under Regulations section 1.882-4(a)(3)(vi) may voluntarily
file Schedule I with the protective return to preserve timely elections under Regulations section 1.882-5(a)(7) if the return
is filed by the original due date (including extensions) of the corporation's Form 1120-F. The protective elections are not
effective if filed during the additional extended period described under Regulations section 1.882-4(a)(3). The foreign corporation
need only complete the relevant portions of Schedule I that identify its right to use the following elections:
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
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).
The corporation need only identify the protective election in the first year it is required to be made under Regulations
section 1.882-5(a)(7) or in any year a taxpayer is eligible to adopt or change an election and chooses to do so for that year.
For example, an election to use the adjusted U.S.-booked liability method or the separate currency pools method is an election
that generally must be maintained for a minimum five-year period. However, the election available to foreign banks to use
30-day LIBOR under the AUSBL method in Step 3 must be made each year. If a corporation is subject to Regulations section 1.882-5
for the first time, the election is due with a timely filed return (excluding the additional extended period provided by Regulations
section 1.882-4(a)(3)) whether or not the taxpayer files a protective return under Regulations section 1.882-4(a)(3)(vi).
The protective election need not be filed with subsequent protective returns filed under Regulations section 1.882-4(a)(3)(vi)
for any subsequent year to which the minimum five-year period applies. However, the indication of the election with a protective
return is only effective for a year that the corporation is engaged in trade or business within the United States. Accordingly,
if a protective election is made for a first year protective return and in fact the taxpayer is not engaged in trade or business
until the second year of activity within the United States, the protective election made in the first year is not effective
for the corporation's second year of activity because Regulations section 1.882-5 is not applicable to the corporation until
such second year. The elections used by a taxpayer for all years in which it files Form 1120-F and reports effectively connected
income must be shown on Schedule I, including years subsequent to the year in which an election under Regulations section
1.882-5(a)(7) is made.
A corporation that files a protective return under Regulations section 1.882-4(a)(3)(vi) need not enter amounts on
Schedule I (other than for the published LIBOR election on line 10d) in order to preserve an allocation method. If a taxpayer
files a protective return under Regulations section 1.882-4(a)(3)(vi) and does not file Schedule I to identify the relevant
elections under Regulations section 1.882-5 for an applicable year, then the Director of Field Operations is authorized to
make all applicable allocation method elections on behalf of the corporation for such applicable year if it is later determined
that the taxpayer was engaged in trade or business within the United States and had ECI during the year.
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).
Other Forms and Schedules Related to Schedule I
Form 1120-F, Schedule L, and Schedule M-3 (Form 1120-F).
The set or set(s) of books that give rise to U.S.-booked liabilities under Regulations section 1.882-5(d)(2) are the
same sets of books and records that are reportable as of the tax year end on Form 1120-F, Schedule L. They are also the same
sets of books and records that are used by foreign banks to report income and expenses on Schedule M-3 (Form 1120-F).
Form 1120-F, Section III, Part II (branch-level interest tax).
The amount of interest expense from Schedule I, line 24d is reportable on Form 1120-F, Section III, Part II, line
7b. The amount of the allocation under Regulations section 1.882-5 reportable on Schedule I, line 23 is reportable on Form
1120-F, Section III, Part II, line 7c.
Schedule M-3 (Form 1120-F), Part III, lines 26b and 26c.
The amount of interest expense allocation reportable on Schedule I, line 23 is includible on Schedule M-3 (Form 1120-F),
Part III, line 26b, columns (d) and (e). The amounts subject to deferral and disallowance on Schedule I, lines 24a through
24c are reportable on Schedule M-3 (Form 1120-F), Part III, line 26c, columns (b), (c), and (e).
Schedule P (Form 1120-F).
Enter amounts from Schedule P (Form 1120-F), lines 20, 18, and 15c on Schedule I, line 5, column (b); line 8, column
(b); and line 9, column (b); respectively, making any necessary adjustments to comply with the rules in Regulations section
Assets and Liabilities Based on Schedule L Set(s) of Books and Records
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.
Required Reporting on Schedule I
Lines 1 through 9.
Schedule I requires disclosure of data and interest allocation elections for all parts of the three-step formula under
Regulations section 1.882-5. On page 1, the corporation is required to complete Step 1 (lines 1 through 5) to determine its
average U.S. assets, Step 2 (lines 6 through 7c) to determine its U.S.-connected liabilities, and Step 3 (lines 8 and 9) to
determine its U.S.-booked liabilities under Regulations section 1.882-5(d)(2) and its related U.S.-booked interest expense.
The total on line 9, column (c) is also used for purposes of determining the corporation's branch interest under section 884(f)(1)(A)
and Regulations section 1.884-4(b), and in the calculation of the corporation's branch-level interest tax on excess interest
under section 884(f)(1)(B) and Regulations section 1.884-4(a)(2). Line 8, column (c), and line 9, column (c) are also included
in the interest expense allocation computation in Step 3 of the AUSBL method if elected by the corporation.
Lines 1 through 9 must be completed by all corporations required to file Schedule I, regardless of whether the corporation
allocates interest expense under the AUSBL or Separate Currency Pools method for the applicable year.
Lines 10 through 20. Allocations, direct interest allocations, deferrals and other disallowances.
Step 3 of the AUSBL method is provided on lines 10 through 15. Step 3 of the Separate Currency Pools method is provided
on lines 16a through 20. These Step 3 methods are mutually exclusive and cannot both apply to the corporation in the same
year. The methods are subject to the general five-year minimum period election rules of Regulations section 1.882-5(a)(7).
AUSBL method filers complete all columns on lines 1 through 15 and lines 21 through 25. Do not complete lines 16a through
Separate currency pools method filers.
Separate Currency Pools method filers complete all columns on lines 1 through 9 and lines 16a through 25. Do not complete
lines 10 through 15.
Lines 21 through 25. Summary – Interest expense allocation and deduction under Regulations section 1.882-5
Line 22. Direct interest allocations.
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.
Line 23. Summary of Regulations section 1.882-5 allocation.
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).
Line 24. Deferrals and disallowances under other Code sections.
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).