Frequency of averaging.   The average value of assets for this step is to be computed at the most frequent, regular intervals for which data is reasonably available. For foreign banks, the minimum averaging period is monthly (beginning of tax year and monthly thereafter). For corporations other than a bank, the minimum averaging period is semi-annually (beginning, middle, and end of the tax year). See Regulations section 1.882-5(b)(3).

Line 1.   Indicate whether the corporation values its U.S. assets on the adjusted basis method (see Regulations section 1.882-5(b)(2)(i)) or whether it has elected the fair market value method (see Regulations section 1.882-5(b)(2)(ii)). The adjusted basis method election is subject to the minimum five-year period described in Regulations section 1.882-5(a)(7). In order to elect the fair market value method, the corporation must also use the actual ratio method (rather than the fixed ratio) under Step 2. Once elected, the fair market value method must be used for Step 1 and Step 2 of the three-step formula under Regulations section 1.882-5 and may not be changed back to the adjusted basis method without advance consent from the Commissioner or his delegate.

Line 2, column (a). Total assets per books.   Enter the total average assets derived from the combined set or set(s) of books that are reportable on Schedule L. The total average assets includes interbranch balances with other set(s) of books of the corporation that are not reportable on Schedule L.

Line 3a, column (a). Total interbranch assets.   Enter on line 3a, column (a), the total of the corporation's average interbranch assets included on line 2, column (a). The average interbranch assets recorded on the set(s) of Schedule L books do not create U.S. assets under Regulations section 1.882-5(b)(1)(iv) and are disregarded for purposes of the interest expense allocation rules.

Line 3b, column (a). Total non-ECI assets under section 864(c)(4)(D).   Enter on line 3b, column (a), the average assets included on line 2, column (a) that give rise to non-ECI received from foreign-related corporations under section 864(c)(4)(D). Such amounts include assets from transactions with foreign-related corporations that give rise to foreign source dividends, interest, rents or royalties, whether or not such amounts are attributable to a U.S. office of the corporation under section 864(c)(5). A foreign related corporation is a foreign corporation the taxpayer owns (under section 958(a)) or is treated as owning (under section 958(b)) more than 50% of the total combined voting power of all classes of stock entitled to vote. Enter the average asset number for assets described in section 864(c)(4)(D) on line 3b, column (a), regardless of whether such assets give rise to non-ECI under another Code section or regulation. For example, report income that is non-ECI under section 864(c)(4)(D) on line 3b, column (a) even if such income is also not attributable to a U.S. office of a banking, financing, or similar business under Regulations section 1.864-6(b)(2)(ii)(b) and the principles of Regulations section 1.864-4(c)(5)(ii).

Line 3c, column (a). Total other non-ECI assets.   Enter on line 3c, column (a), all other assets (or portion thereof) included on line 2, column (a) that give rise to domestic or foreign source non-ECI. If income from a security is treated as partially ECI and partially non-ECI under Regulations section 1.864-4(c)(5)(ii), enter the amount of the asset on line 3c, column (a) in the proportion that the income, gain, or loss from such asset that is treated as non-ECI bears to the total income, gain, or loss from such asset. Do the same for the non-ECI portion of any asset whose income is allocated under the proposed global dealing regulations or under an Advance Pricing Agreement pursuant to a competent authority agreement. See Proposed Regulations sections 1.884-1(d)(2)(vii) and 1.884-1(d)(2)(xi), Example 8. Attach a statement which describes each type of “other” non-ECI asset included on line 3c. For each type, show the calculation of the amount included on line 3c for that type, including a total for each type. With respect to any amount included on line 3c pursuant to Regulations section 1.864-4(c)(5)(ii)), attach a separate statement which indicates this amount and how it was calculated.

Line 3d, column (a). Adjustments for amounts from partnerships and certain disregarded entities included on line 2, column (a).   With respect to amounts from partnerships included on line 2, column (a), all such amounts must be “backed out” on this line 3d, column (a). Enter on line 3d, column (a), all amounts on the Schedule L books for investments in partnerships (whether recorded as an investment in the partnership interest or in the partnership assets) included on line 2, column (a).

  With respect to amounts from disregarded entities included on line 2, column (a), enter on line 3d, column (a) any adjustment needed to reflect the following: Investments in disregarded entities should not be included on line 2, column (a) if the set(s) of books are reportable on Schedule L. Instead, the total assets of such disregarded entity's Schedule L books should be combined on line 2, column (a) with all other set(s) of books reportable on Schedule L. If another Schedule L book reflects an investment in a disregarded entity whose books are not reportable on Schedule L, then the assets of the disregarded entity are not reported on line 2, column (a). The amount of the investment in the disregarded entity that is included in the total assets reported on line 2, column (a) must be reversed on line 3d, column (a) to reflect its disregarded treatment in Regulations section 1.882-5.

Line 3e, column (a). Adjustments for assets that give rise to direct interest expense allocations under Regulations section 1.882-5(a)(1)(ii).   Enter on line 3e, column (a), the average value of the portion of all assets included on line 2 that give rise to direct interest expense allocations under Regulations section 1.882-5(a)(1)(ii) in accordance with the requirements of Temporary Regulations section 1.861-10T(b) or (c), and Temporary Regulations section 1.861-10T(d). A foreign corporation that allocates its interest expense under the direct allocation rules shall reduce the basis of the asset that meets the requirements of Temporary Regulations section 1.861-10T (b) or (c) by the principal amount of the indebtedness that meets the requirements of Temporary Regulations section 1.861-10T (b) or (c). The amount of directly allocable interest under Regulations section 1.882-5(a)(1)(ii) is reported on line 22.

Line 3f, column (a). Other adjustments to average assets included on line 2.   Enter on line 3f, column (a), the average asset balances for any other amounts included on line 2, column (a) that do not constitute U.S. assets as defined in Regulations section 1.884-1(d). Assets includible on this line may include, for example, amounts with respect to securities that are marked-to-market for tax purposes under section 475 that are not marked-to-market on the set(s) of books reported on line 2, column (a). If the mark-to-market amount includible for tax purposes is an increase to the basis of the assets included on line 2, column (a), include such increase as a negative number on line 3f, column (a). Similarly, if the mark-to-market amount decreases the basis of the assets included on line 2, column (a), include such decrease as a positive number on line 3f, column (a). Other adjustments for book-to-tax differences with respect to asset values on line 2, column (a), such as depreciation and amortization for taxpayers using the adjusted basis method for valuing U.S. assets, are also reportable on line 3f, column (a). Enter an aggregate net increase as a negative number. Enter an aggregate net decrease as a positive number.

Line 4, column (a).   Combine lines 3a through 3f and enter the result on line 4, column (a). The result on line 4, column (a) constitutes the total net adjustment to the average book assets from the Schedule L set(s) of books reported on line 2, column (a).

Line 6. Actual ratio or fixed ratio method.   Check the applicable box to specify whether the corporation uses the actual ratio or the fixed ratio method for the tax year to determine its U.S.-connected liabilities in Step 2 of the allocation formula. (If the fair market value method is used (line 1), the actual method ratio must also be used.) The amount of U.S.-connected liabilities is the total value of U.S. assets for the tax year (line 5, column (d)) multiplied by the actual ratio or the applicable fixed ratio the corporation has timely elected and is eligible to use for the tax year. The actual ratio or fixed ratio election must be made on a timely filed tax return for the first year the corporation is subject to Regulations section 1.882-5 and is subject to the minimum five-year period under Regulations section 1.882-5(a)(7). An election to change the method after such minimum five-year period is also subject to the minimum five-year period.

Actual ratio information.   If the corporation uses the actual ratio, complete lines 6a through 6c and skip line 6d.

Fixed ratio information.   If the corporation uses the fixed ratio, skip lines 6a through 6c and enter the applicable fixed ratio on line 6d. For foreign banks (described in Regulations section 1.882-5(c)(4)), the fixed ratio is 95%. For corporations other than foreign banks and insurance companies, the fixed ratio is 50%.

Line 10. 30-day LIBOR election for banks.   If the corporation is a foreign bank that elects to compute excess interest under the AUSBL method using a published 30-day LIBOR for the tax year, check the box on line 10 and skip lines 10a through 10c. Enter the published 30-day LIBOR on line 10d. See Regulations section 1.882-5(d)(5)(ii)(B) for additional information. The 30-day LIBOR election does not apply to corporations other than foreign banks. For this purpose, the corporation is eligible to make the 30-day LIBOR election under the same standard that qualifies the corporation as a bank eligible to make the 95% fixed ratio election in Regulations section 1.882-5(c)(4). The 30-day LIBOR election is an annual election.

Line 10a. Actual U.S. dollar interest.   If the corporation does not properly make or is not eligible to make a 30-day LIBOR election for the tax year, enter the interest expense paid or accrued by the corporation for the tax year on its average worldwide U.S. dollar liabilities, excluding U.S.-booked liabilities included on line 8, column (c).

Line 10b.   Enter on line 10b, the average worldwide U.S. dollar denominated liabilities (whether or not interest bearing) that are not U.S.-booked liabilities included on line 8, column (c). See Regulations section 1.882-5(d)(5)(ii).

Line 10e.   If the amount on line 10b is zero and the foreign corporation is not a bank (and is therefore not permitted to elect the 30-day LIBOR), enter on line 10e an interest rate that is reasonable under the facts and circumstances. One reasonable approach in determining such interest rate would include using an interest rate that:

Line 12. Excess interest.   Multiply the rate on line 10e by the amount of excess U.S.-connected liabilities on line 11 and enter the result on line 12. This amount is the corporation's excess interest expense portion of its overall Regulations section 1.882-5 allocation that is allocable to effectively connected income under the AUSBL method in Regulations section 1.882-5(d)(5). The amount on line 12 also constitutes the corporation's excess interest under section 884(f)(1)(B). See Regulations section 1.884-4(a)(2).

Line 13. Interest expense allocation.   Add the amount reported on line 12 and the amount of U.S.-booked interest expense from line 9, column (c) and enter the result on line 13. This amount is the corporation's total amount of interest expense allocable under the three-step formula when U.S.-connected liabilities exceed U.S.-booked liabilities under the AUSBL method. It does not include any amounts directly allocable to effectively connected income under Regulations section 1.882-5(a)(1)(ii).

Line 14b. Scaled-down U.S. book interest.   Multiply the amount of U.S. booked interest on line 9, column (c), by the scale-down ratio on line 14a, and enter the result on line 14b. The allocated amount is the total amount of the AUSBL method allocation under Regulations section 1.882-5(d)(4). The amount on line 14b does not include any amount directly allocable to ECI under Regulations section 1.882-5(a)(1)(ii).

If the corporation has income, expense, gain, or loss from a hedging transaction of a U.S.-booked liability that gives rise to interest expense subject to the scale-down ratio, such hedging income, expense, gain, or loss amount is also subject to reduction under the same scaling ratio reported on line 14a. See Regulations section 1.882-5(d)(4) and Proposed Regulations section 1.882-5(d)(2)(vi). Do not report such scale-down reductions of hedging income, expense, gains, or losses on line 14b. The ratio reported on line 14a shall be applied to each type of item in accordance with its characterization and the scaled down hedging income, expense, gain, or loss is reported on Form 1120-F, Section II in the appropriate category to which the hedging item is characterized. For instance, periodic expense from an interest rate notional principal contract hedging transaction that is recorded on the sets of books reportable on Schedule L, and that is subject to the scaling ratio, is reported on Form 1120-F, Section II, line 27. Such amount is also subject to reporting on Schedule H (Form 1120-F), line 38a, as allocable in part to ECI and in part to non-ECI in accordance with the scaling ratio of line 14a.

For each applicable column, multiply the U.S. assets on line 16a by the U.S.-connected liability ratio on line 17a and enter the amount on line 17b. The resulting amount constitutes the U.S.-connected liabilities for each currency pool when the corporation does not make a U.S. liability reduction election under Regulations section 1.884-1(e)(3).

If the corporation makes one or more U.S. liability reduction elections for the tax year under Regulations section 1.884-1(e)(3), the total amount of the liability reduction shown on line 7b must be allocated to each of the separate currency pools in proportion to the U.S. assets in each pool. The amount entered on line 17b for each column is computed as:

Attach a schedule showing the computation and the allocation of the liability reduction election to each separate currency pool.

Enter on line 24a the amount of allocable interest expense on line 23 that is subject to further allocation and apportionment to tax-exempt income under section 265 or under the provisions of an applicable income tax treaty. Attach a statement showing how such allocation between exempt and non-exempt ECI has been made. See Regulations section 1.882-5(a)(5) and Regulations section 1.882-5(a)(8), examples (3) and (4). Treaty-exempt income may include income that is ECI under the force of attraction principle of section 864(c)(3) but which is business profits not attributable to a U.S. permanent establishment of the corporation under an applicable treaty to which Regulations section 1.882-5 applies in determining the attributable business profits. For such treaties, the amount allocable to ECI reported on line 23 requires additional allocation and apportionment between taxable ECI and treaty-exempt ECI under Regulations section 1.882-5(a)(5).

Enter on line 24b the amount of allocable interest expense on line 23 that is subject to deferral (for example, under sections 163(e)(3), 163(j) or 267(a)(3)) in the current tax year. Also enter on line 24b the amount of allocable interest expense deferred under any of these sections in a prior year that is deductible in the current taxable year. If the amount of current year deferrals of the interest expense allocated and reported on line 23 exceeds the current year amount of the deductible amount of prior year interest deferrals, enter the excess current year deferral as a negative number on line 24b. If the current year deductible amount of prior year deferrals exceeds the current year deferrals, enter the excess deductible amount over the current year deferrals as a positive number on line 24b.

Attach a statement indicating the amount of current year deferral and the amount of current year deduction of a prior year deferral for each applicable provision. In the case of deferrals and deductions under section 163(j), attach Form 8926, Disqualified Corporate Interest Expense Disallowed Under Section 163(j) and Related Information, in lieu of, or in addition to, a statement .

Enter on line 24c the amount of interest expense allocation reported on line 23 that is capitalizable under section 263A. Attach a statement describing how such allocation has been made.

Combine lines 24a, 24b, and 24c and enter the result on line 24d. The amount entered on line 24d is also reported and reconciled for its temporary and permanent differences on Schedule M-3 (Form 1120-F), Part III, line 26c, columns (b) and (c). See the Instructions for Schedule M-3 (Form 1120-F), Part III, line 26c.