Table of Contents
- Lines 1 Through 9: All Foreign Corporations
- Lines 1 Through 5. Step 1: Determination of Total Value of U.S. Assets
- Lines 6 Through 7c. Step 2: Determination of U.S.-Connected Liabilities - Regulations Section 1.882-5(c)
- Lines 8 and 9. Step 3: Interest Expense Allocation (Including U.S.-Booked Liabilities and U.S.-Booked Interest Expense Included in the Determination of Branch Interest)
- Lines 10 Through 15. Step 3: Adjusted U.S.-Booked Liabilities Method
- Lines 16a Through 20. Step 3: Separate Currency Pools Method
- Lines 21 Through 25. Summary – Interest Expense Allocation and Deduction Under Regulations Section 1.882-5
The reference to the definition of the term “bank” for purposes of determining the U.S.-booked liabilities of banks under Regulations section 1.882-5(d)(2)(iii) requires that the corporation meet the section 585(a)(2) regulated banking requirements in its trade or business within the United States. The section 585(a)(2) standard must also be satisfied at the corporation's U.S. trade or business level for purposes of electing the deposit liability safe harbor applicable to the reduction of excess interest under Regulations section 1.884-4(a)(2)(iii).
Assets includible on lines 1 through 5 are the U.S. assets of the corporation as defined in Regulations sections 1.882-5(b) and 1.884-1(d). The U.S. assets are valued on an average basis for interest expense allocation purposes.
If under the global dealing proposed regulations (Proposed Regulations section 1.863-3(h), which references the Proposed Regulations section 1.482-8 principles), the corporation recognizes an amount recorded as an interbranch asset, such amount is treated as the allocation and source of third-party securities dealing income and is not eliminated from U.S. assets on line 3a, column (a). Such interbranch assets are eliminated only to the extent they are allocated under Proposed Regulations section 1.863-3(h) to foreign source non-ECI. The allocable amount to non-ECI is eliminated from U.S. assets on line 3c, column (a) (total other non-ECI assets).
Partnership interests are reported in Step 1 as follows: The corporation's adjusted outside basis in a partnership (from Schedule P (Form 1120-F), line 20, “Total” column) that is treated as a U.S. asset under Regulations sections 1.882-5 and 1.884-1(d)(3) is generally entered on Schedule I (Form 1120-F), line 5, column (b).
A liability reduction election may be made only to the extent needed to reduce a dividend equivalent amount under section 884(b) to zero. See Regulations section 1.884-1(e)(3)(iv) for the time, place, and manner for making the liability reduction election and the separate disclosures required to be attached to Form 1120-F for each liability reduction election made.
If the corporation uses the Separate Currency Pools Method for Step 3 (lines 16a through 20), the amount included on line 7b must also be allocated to determine the U.S.-connected liabilities for each currency. See the instructions for lines 7c below and line 17b later. If no liability reduction election is made for the tax year, enter -0- on line 7b.
Corporations other than banks. The definition of U.S.-booked liability for a foreign corporation other than a bank is described in Regulations section 1.882-5(d)(2)(ii). Liabilities reflected on the Schedule L books must be recorded on such books reasonably contemporaneous to the time the liability is incurred.
Foreign banks. The liability recorded on the set(s) of Schedule L books must be that of a foreign bank that conducts regulated banking operations in the United States as described in section 585(a)(2)(B). Note: This requirement applies only for the determination of U.S.-booked liabilities and corresponding U.S.-booked interest expense. It does not apply for other purposes such as determining the eligibility for the fixed ratio under Step 2, reportable on line 6d. The liability must be recorded on the Schedule L books before the close of the day on which the liability is incurred unless an inadvertent error is shown under the facts and circumstances. See the definition and requirements for U.S.-booked liabilities of foreign banks under Regulations section 1.882-5(d)(2)(iii). Note: The section 585(a)(2)(B) standard also applies for eligibility to reduce excess interest using the deposit liability safe harbor under the branch-level interest tax on excess interest under Regulations section 1.884-4(a)(2)(iii).
If the amount on line 7c exceeds the amount on line 8, column (c), the corporation has “excess interest” as defined in section 884(f)(1)(B). Complete lines 10 through 13, and skip lines 14a and 14b. If the amount on line 7c is less than or equal to the amount on line 8, column (c), skip lines 10 through 13, and complete the determination of the scaling ratio on lines 14a and 14b.
Approximates the foreign corporation's actual average U.S.-dollar borrowing rate with respect to interest-bearing U.S.-dollar denominated liabilities and
Is consistently applied by the foreign corporation from year to year.
Examples of interest rates that would generally be considered reasonable include the actual average interest rate on interest-bearing U.S.-dollar denominated liabilities that are U.S.-booked liabilities or an average arm's length rate of interest that would be charged to the foreign corporation on its interest-bearing U.S.-dollar denominated liabilities. A U.S.-dollar borrowing rate of zero would generally not be considered reasonable.
If the rules set forth above apply to the foreign corporation, attach a statement to Schedule I (Form 1120-F) explaining how the interest rate entered on line 10e was derived.
If U.S.-connected liabilities on line 7c are equal to or less than U.S.-booked liabilities on line 8, column (c), the AUSBL method allocation is subject to a “scale-down” of the U.S.-booked interest expense reported on line 9, column (c). Complete lines 14a and 14b in lieu of lines 10 through 13. If line 7c exceeds line 8, column (c), leave lines 14a and 14b blank.
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.
Corporations that allocate interest expense under a Separate Currency Pools election report the allocations under a three-step method for each currency in which the corporation has U.S. assets (as defined in Regulations section 1.884-1(d)), on Schedule I, lines 16a through 20. The amount of the interest expense allocation is the sum of the separate interest expense allocations in each currency. If the corporation makes a 3% currency election under Regulations section 1.882-5(e)(1)(i), check the box on line 16b and include the U.S. dollar value of all currencies for which the 3% currency election applies in the U.S. dollar denominated column on line 16a.
Schedule I accommodates reporting of the interest expense allocations in four currencies (including the U.S. dollar and the foreign corporation's functional currency). If the foreign corporation has U.S. assets in more than four currencies that are not subject to a 3% currency election, attach separate sheets using the same size and format as shown on the schedule and provide the information requested on lines 16a through 19 on the attached sheets for all such additional currencies. Report on Schedule I, line 20, column (d), the total results for all separate currency allocations shown on line 19 for columns (a) through (d), plus any additional line 19 amounts shown on attached separate sheets (if any).
The sum of all U.S. assets in columns (a) through (d) (and in any columns shown on any attached separate sheets) must equal the total average U.S. assets entered on line 5, column (d).
A transaction that hedges a U.S. asset is taken into account for purposes of determining the currency denomination and the value of the U.S. asset. See Regulations section 1.882-5(e)(1)(i).
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:
The amount on line 16a multiplied by the ratio on line 17a, less
The amount of the liability reduction election entered on line 7b multiplied by the proportion that the average U.S. assets in the separate currency pool bears to all of the U.S. assets in all separate currencies (i.e., the total average U.S. assets entered on line 5, column (d)).
Attach a statement showing the computation and the allocation of the liability reduction election to each separate currency pool.
See Temporary Regulations section 1.861-10T(d) for rules requiring reductions in basis to assets required by the direct interest allocation rules in Temporary Regulations section 1.861-10T(b) or (c). The rules of Temporary Regulations section 1.861-10T(c) apply only to non-financial institutions. Financial institutions are permitted to directly allocate interest expense only under the non-recourse indebtedness rules described in Temporary Regulations section 1.861-10T(b).
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). Also include on line 24a any other interest expense that is disallowed by a section of the Internal Revenue Code (e.g., section 163(f)(2)) or an income tax treaty.
Enter all amounts on line 24a as a negative amount. These line 24a amounts are a reduction of the allocation in determining the deductible interest expense for the year.
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.
If the corporation made an election under section 108(i) to defer income from cancellation of debt in connection with an applicable debt instrument reacquired after December 31, 2008, and before January 1, 2011, and, as part of the reacquisition, issues a debt instrument with Original Issue Discount (“OID”) that is subject to section 108(i)(2), the interest deduction for this OID is deferred. Include as a negative number on line 24b the amount of allocable interest expense on line 23 that is subject to such deferral in the current tax year. The accrued OID is allowed as a deduction ratably over the 5-year period that the income from cancellation of debt is includible in income. The deduction is limited to the income from the canceled debt with respect to the debt instrument reacquired. Include as a positive number on line 24b any such deduction which pertains to amounts deferred in a prior tax year that is deductible in the current tax year.
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.
Enter all amounts on line 24c as a negative amount. These amounts are treated as a reduction of the allocation in determining the deductible interest expense for the year.
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.
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