Free 2008 Instruction 1120-F Schedule I - Federal

2008
Instructions for Schedule I (Form 1120-F)
Interest Expense Allocation Under Regulations Section 1.882-5
Section references are to the Internal Revenue Code unless otherwise noted. Regulations section 1.882-5T(a)(1)(ii). The interest allocation rules of Regulations section 1.882-5 and Temporary Regulations section 1.882-5T 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 principles by analogy. For treaties that expressly provide for such attribution, see Article 7 and the accompanying Exchange of Notes to the 2001 United States-United Kingdom and 2003 United States-Japan Income Tax Treaties. If the foreign corporation files its tax return using a treaty-based method of the type provided in these treaties, complete Form 8833 (and attach it to Form 1120-F) to disclose the treaty position taken.

Department of the Treasury Internal Revenue Service

What's New
New Form 8926. In some cases, new Form 8926, Disqualified Corporate Interest Expense Disallowed Under Section 163(j) and Related Information, must be attached to Schedule I (Form 1120-F). See the instructions for line 24b for more details.

Treaty-based return positions. If the corporation reports 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 instead of under Regulations section 1.882-5, then Schedule I, lines 1 through 9 must be completed applying the rules of Regulations section 1.882-5 and attached to Form 1120-F.

General Instructions
Purpose of Schedule
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), Regulations section 1.882-5, and Temporary Regulations section 1.882-5T. The schedule also identifies the various elections the taxpayer uses, and discloses the basic calculations for the year under Temporary Regulations sections 1.882-5T(a)(7) and 1.882-5T(d)(5), and under the branch profits tax rules of Temporary Regulations section 1.884-1T(e)(3). Note. The tax elections under Temporary Regulations sections 1.882-5T and 1.884-1T(e)(3) are not effected under the regulations by their identification on Schedule I (Form 1120-F). See the requirements for the time, place and manner for making the interest expense allocation and branch profits tax liability reduction elections for Temporary Regulations sections 1.882-5T(a)(7) and 1.884-1T(e)(3). Under Regulations section 1.882-5 and Temporary Regulations section 1.882-5T, 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 allocable by the foreign corporation under the three-step process set forth in paragraphs (b), (c), and (d) or (e) of the regulation and the directly allocated interest expense determined under Temporary

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 Temporary Regulations section 1.882-5T(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 check boxes); · The fixed or actual ratio in step 2 (line 6 check boxes);

Who Must File
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. Reporting corporation. 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.
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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 Temporary Regulations section 1.882-5T(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. 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 Temporary Regulations section 1.882-5T(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. Note. Under Temporary Regulations section 1.882-5T(a)(7), no interest

· The published LIBOR election for

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 Temporary Regulations section 1.882-5T(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) and Temporary Regulations section 1.882-5T(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 19, 17, and 14c on Schedule I, line 5, column (b); line 8, column (b); and line 9, column (b); respectively.

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 and Temporary Regulations section 1.882-5T. 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 and U.S. booked interest expense under Regulations section 1.882-5(d)(2) and Temporary Regulations section 1.882-5T(d)(2). 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). 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 CAUTION 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. Schedule I, lines 1 through 9 must also be completed under the rules of Regulations section 1.882-5 and Temporary Regulations section 1.882-5T even if the corporation reports business profits attributable to a U.S. permanent establishment (other than under the ECI rules of sections 864(c), 882(a) and 882(c)) pursuant to the express provisions of an applicable income tax

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) and Temporary Regulations sections 1.882-5T(d)(2)(ii)(A) and (iii)). 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

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treaty and accompanying documents (such as an Exchange of Notes). 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 16 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 Temporary Regulations section 1.882-5T(a)(7). AUSBL method filers. AUSBL method filers complete all columns on lines 1 through 15 and lines 21 through 25. Do not complete lines 16 through 20. Separate currency pools method filers. Separate Currency Pools method filers complete all columns on lines 1 through 9 and lines 16 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 Temporary Regulations section 1.882-5T(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).

conducted on a worldwide basis. To qualify as a bank for interest expense allocation purposes, the foreign corporation must be subject to bank regulatory supervision and examination in its home country of a type similar to that required of domestic banks by a State or Federal authority having supervision over banking institutions, and a substantial amount of the corporation's business must consist of receiving deposits and making loans and discounts, or of exercising fiduciary powers similar to those permitted to national banks under authority of the Comptroller of the Currency. See sections 581 and 585(a). Note. 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) and Temporary Regulations section 1.882-5T(d)(iii)(A) 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).

Lines 1 Through 9: All Foreign Corporations
Lines 1 Through 5. Step 1: Determination of U.S. Assets
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), and Temporary Regulations section 1.882-5T(b). The U.S. assets are valued on an average basis for interest expense allocation purposes. 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. See Temporary Regulations section 1.882-5T(b)(3). 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). 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 Temporary Regulations section 1.882-5T(b)(2)(ii)). The adjusted basis method election is subject to the minimum five-year period described in Temporary Regulations section 1.882-5T(a)(7). The fair market value method cannot be changed to the adjusted basis method without advance consent from the Commissioner or his delegate.

Specific Instructions
Item A. Foreign banks. Check the box in item A if the foreign corporation is a bank as defined in Temporary Regulations section 1.882-5T(c)(4). The term "bank" is defined in the regulation as a bank that meets the statutory definition applicable to domestic banks (except for the fact the corporation is foreign) and without regard to whether the corporation's required banking activities are effectively connected with its trade or business within the United States. The required banking activities need only be

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. Note. 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). 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

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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 (c) 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. 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). Note. Partnership interests are reported in Step 1 as follows: The ECI portion of the corporation's adjusted outside basis in a partnership (from Schedule P (Form 1120-F), line 19, "Total" column) is entered on Schedule I (Form 1120-F), line 5, column (b). 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 section 1.882-5. Line 3e, column (a). Adjustments for assets that give rise to direct interest expense allocations under Temporary Regulations section 1.882-5T(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 Temporary Regulations section 1.882-5T(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 Temporary Regulations section 1.882-5T(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 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 5. Total Value of U.S. Assets for the Tax Year
Line 5, column (a). Average U.S. assets on set(s) of Schedule L books. Subtract the amount on line 4, column (a) from line 2, column (a) and enter the amount on line 5, column (a). The resulting amount is the total average value of U.S. assets under Regulations section 1.884-1(d) included on the Schedule L set(s) of books, excluding any partnership interests included on line 2. Line 5, column (b). ECI portion of the average value of partnership interests. Enter on line 5, column (b), the amount from Schedule P (Form 1120-F), line 19 ("Total" column). This amount is the sum of all ECI portions of the corporation's outside basis in partnership interests as adjusted under Regulations section 1.884-1(d)(3). The amount entered from Schedule P, line 19 may include the ECI portion of the corporation's outside basis in partnerships whose book value is

included on line 2, column (a) as well as the ECI portion of partnership interests whose book value is not recorded on the Schedule L books and is not included on line 2, column (a). Line 5, column (c). Average U.S. assets not includible in set(s) of Schedule L books reported on line 5, column (a), or from partnerships reported on line 5, column (b). Enter on line 5, column (c), the average value of U.S. assets (other than the ECI portion of the corporation's outside basis in partnership interests) from set(s) of books that are not reportable on Schedule L. Such assets may generally include certain securities attributable to a U.S. office of a banking, financing, or similar business under Regulations section 1.864-4(c)(5)(iii) that are booked in a foreign bank's home office or other foreign location. Other assets reportable on line 5, column (c), may generally also include assets that are no longer held in connection with a trade or business within the United States that give rise to effectively connected income under section 864(c)(6) or section 864(c)(7). However, not all assets that give rise to ECI, including ECI recognized under section 864(c)(7), constitute U.S. assets under Regulations section 1.884-1(d). See Regulations section 1.884-1(d)(2)(xi), example 5, and Regulations section 1.884-1(d)(5). Line 5, column (d). Total average value of U.S. assets included in Step 1. Combine the amounts on line 5, columns (a), (b), and (c) and enter the amount on line 5, column (d). This amount is the total average value of the corporation's U.S. assets included in Step 1 of the Regulations section 1.882-5 formula. If the corporation uses the Separate Currency Pools method to allocate interest expense in Step 3 of the Regulations section 1.882-5 formula, see the instructions for line 16a on page 7. The amount on line 5, column (d) is also reportable on Schedule H (Form 1120-F), line 22a.

Lines 6 Through 7c. Step 2: Determination of U.S.-Connected Liabilities Regulations Section 1.882-5(c)
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. 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 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 Temporary Regulations section

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1.882-5T(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 Temporary Regulations section 1.882-5T(c)(4)), the fixed ratio is 95%. For corporations other than foreign banks, the fixed ratio is 50%.

Actual Ratio Filers -- Regulations Section 1.882-5(c)
Line 6a. Average worldwide liabilities. Enter on line 6a the average worldwide liabilities as adjusted for U.S. tax principles for the year. The corporation's worldwide liabilities include the liabilities of only the corporation filing the Form 1120-F, plus the corporation's share of partnership liabilities and any liabilities of any disregarded entities that are treated as liabilities of the foreign corporation under U.S. tax principles. The books of the foreign corporation and any such disregarded entities must be combined, with applicable eliminating entries for transactions between them. See Regulations section 1.882-5(c)(2)(viii). The classification of the worldwide liabilities is determined under U.S. tax principles. See Regulations section 1.882-5(c)(2). The value of the worldwide liabilities must be determined substantially in accordance with U.S. tax principles. Foreign banks must average the worldwide liabilities using the beginning, middle, and end of year values. Corporations other than banks must average the worldwide liabilities using the year-to-year values of its liabilities. Line 6b. Average worldwide assets. Enter the average worldwide assets as adjusted for U.S. tax principles on line 6b, using the same nonconsolidated books for reporting average worldwide liabilities on line 6a. Transactions with disregarded entities included in the actual ratio computation constitute interbranch transactions under U.S. tax principles and must be eliminated. See Regulations section 1.882-5(c)(2)(viii). Use the same averaging period applicable to worldwide liabilities. If the corporation uses the actual ratio method, the amount entered on line 6b is also reported on Schedule H (Form 1120-F), line 22b.

determined before the application of any liability reduction election(s) made under Regulations section 1.884-1(e)(3) and Temporary Regulations section 1.884-1T(e)(3). Line 7b. U.S. liability reduction election amount. Enter the total amount of all liability reduction election amounts made under Regulations section 1.884-1(e)(3) and Temporary Regulations section 1.884-1T(e)(3). Note. A liability reduction election may be made only to the extent needed to reduce a dividend equivalent amount under section 884 to zero. See Temporary Regulations section 1.884-1T(e)(3) 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 16 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 and 17b below. If no liability reduction election is made for the tax year, enter -0- on line 7b. Line 7c. U.S.-connected liabilities. Subtract line 7b from line 7a and enter the amount on line 7c. The amount entered is the amount of U.S.-connected liabilities for purposes of determining the amount of interest expense allocable to effectively connected income in Step 3. If the corporation uses the Separate Currency Pools Method for Step 3, the sum of all U.S.-connected liabilities shown on line 17b (including any attachments for lines 16 through 19 for additional separate currency pool computations) must equal the amount shown on line 7c after the liability reduction election has been taken into account.

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)
Line 8. Average Third Party U.S.-Booked Liabilities
Line 8, column (a). Schedule L U.S. booked liabilities. Enter on line 8, column (a), the average amount of third-party U.S.-booked liabilities from the set(s) of books reportable on Schedule L using the most frequent averaging period available but not less frequently than the minimum averaging periods required for U.S. assets reported on line 5. The average U.S.-booked liabilities include all third-party liabilities on the set(s) of Schedule L books whether interest bearing or not. Exclude interbranch liabilities shown on the Schedule L books unless such amounts are treated as allocations of third-party amounts with respect to a global dealing operation

under Proposed Regulations section 1.863-3(h) (e.g., mark-to-market valuations of dealer derivative securities may constitute liabilities that are treated as U.S. booked liabilities includible on line 8, column (a)). Do not include liability amounts on line 8a to the extent they give rise to directly allocable interest under Temporary Regulations section 1.882-5T(a)(1)(ii) or are partnership liabilities includible in column (b). · Corporations other than banks. The definition of U.S. booked liability for a corporation other than a bank is described in Regulations section 1.882-5(d)(2)(ii) and Temporary Regulations sections 1.882-5T(d)(2)(ii)(A)(2) and (3). 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)(B) and Temporary Regulations section 1.882-5T(d)(2)(iii)(A). 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). Line 8, column (b). U.S. booked liabilities of partnership interests. Enter on line 8, column (b), the amount from Schedule P, line 17 ("Total" column). This amount is the corporation's average U.S. booked liabilities with respect to its distributive share of liabilities during the averaging period from partnerships engaged in trade or business within the United States. The amount reportable on line 8, column (b), and Schedule P is the corporation's share of partnership liabilities for which it is allocated a distributive share of interest expense. See Regulations section 1.884-1(d)(3)(vi).

Fixed Ratio Filers -- Temporary Regulations Section 1.882-5T(c)(4)
Line 7a. U.S.-connected liabilities before Regulations section 1.884-1(e)(3) election(s). Multiply the average U.S. assets from line 5, column (d), by the ratio entered on line 6e and enter the result on line 7a. The result is the amount of U.S.-connected liabilities

Line 9. U.S. Booked Interest Expense
Line 9, column (a). Schedule L booked interest expense. Enter the amount of third-party interest expense from the Schedule L set(s) of books with respect to liabilities reported on line 8, column (a). Do not include interest expense that is

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directly allocable under Temporary Regulations section 1.882-5T(a)(1)(ii), including the corporation's distributive share of direct interest expense allocations from partnerships otherwise reportable in column (b). All direct interest expense allocations to ECI are reported on line 22. Line 9, column (b). U.S. booked interest expense from partnerships. Enter on line 9, column (b), the amount from Schedule P (Form 1120-F), line 14c ("Total" column). Do not include interest expense that is directly allocable under Temporary Regulations section 1.882-5T(a)(1)(ii) from the corporation's distributive share of a partnership's direct interest expense allocations. All direct interest expense allocations to ECI are reported on line 22. Line 9, column (c). Total U.S. booked interest expense. Add the amounts on line 9, column (a), and line 9, column (b) and enter the result on line 9, column (c). This result is also required to be reported on Form 1120-F, Section III, line 8. This amount is the corporation's tentative branch interest for purposes of the branch-level interest tax under Regulations section 1.884-4(b). See the instructions for Form 1120-F, Section III, Part II, line 8.

filed, see the instructions for making a protective 30-day LIBOR election on Schedule I filed with the protective return.

Lines 10a Through 10c. Excess Interest ­ Average Actual U.S. Dollar Rate
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 Temporary Regulations section 1.882-5T(d)(5)(ii). 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. book 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 Temporary Regulations section 1.882-5T(a)(1)(ii).

Lines 10 Through 15. Step 3: Adjusted U.S. Booked Liabilities Method
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.

allocable to ECI under Temporary Regulations section 1.882-5T(a)(1)(ii). Hedging amounts. 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 this line 14b.

Lines 16 Through 20. Step 3: Separate Currency Pools Method
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 16 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 16 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).

Lines 10 Through 13. Computation of AUSBL Method Allocation with Excess Interest
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 the 30-day published U.S. dollar LIBOR rate for the tax year, check the box on line 10 and skip lines 10a through 10c. Enter the published 30-day U.S. dollar LIBOR rate on line 10d. See Temporary Regulations section 1.882-5T(d)(5)(ii)(B) for the requirements and separate statement required to be attached to a timely filed Form 1120-F. 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 U.S. dollar LIBOR election under the same standard that qualifies the corporation as a bank eligible to make the 95% fixed ratio election in Temporary Regulations section 1.882-5T(c)(4). If a protective return is

Lines 14a Through 15. Computation of AUSBL Method Allocation Under the Scale-Down Ratio
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. 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

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Line 16a. U.S. Assets -- U.S. dollar value denominated in currency. Enter the U.S. dollar value of the average amount of U.S. assets in the appropriate column (a) through (d) (or on the attached separate sheets for additional currencies). Enter in column (a) the U.S. dollar denominated U.S. assets, plus the U.S. dollar value of any U.S. assets for which a 3% currency election is applicable for the tax year. In column (b), enter the average U.S. dollar value of U.S. assets denominated in the corporation's home country functional currency. Enter the average U.S. assets of all other currency pools beginning with column (c). Note. 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). Line 17b. U.S.-connected liabilities per currency. Complete line 17b as follows: Determination of U.S.-connected liabilities if no U.S. liability reduction election is made. 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) and Temporary Regulations section 1.884-1T(e)(3). Determination of U.S.-connected liabilities if a U.S. liability reduction election is made. If the corporation makes one or more U.S. liability reduction elections for the tax year under Regulations section 1.884-1(e)(3) and Temporary Regulations section 1.884-1T(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: 1. The amount on line 16a multiplied by the ratio on line 17a, less 2. 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 schedule showing the computation and the allocation of the liability reduction election to each separate currency pool. Line 18a. Worldwide book interest expense for each separate currency

pool. Enter for each column on line 18a, the corporation's worldwide interest expense paid or accrued for the tax year in the separate currency pool. In column (a), enter the worldwide U.S. dollar interest paid or accrued. For all other separate currency pools, enter the worldwide interest expense in the functional currency of the currency pool. Do not enter the U.S. dollar value of the functional currency pool in column (b) or for any other non-U.S. dollar currencies for which a separate currency pool allocation is made in additional columns. See Regulations section 1.882-5(e)(2). The worldwide interest expense in each currency pool includes interest expense in each currency that is recorded on the Schedule L books and reportable on Schedule I, line 9, column (c). Line 18b. Worldwide average liabilities in each separate currency pool. Enter on line 18b, the average liabilities (whether or not interest bearing) denominated in each separate currency pool. In column (a), enter the average worldwide liabilities (whether or not interest bearing) denominated in U.S. dollars. For all other separate currency pools, enter the average amount of liabilities (whether or not interest bearing) denominated in the currency of the currency pool. Do not enter the U.S. dollar value of the currency pool for any column other than column (a). In determining the average worldwide borrowing rate, the liabilities in each currency pool include the amounts recorded on the sets of books reportable on Schedule L and included on Schedule I, line 8, column (c). Determine the average third-party liabilities using the most frequent averaging period for which data is reasonably available in accordance with the principles of Temporary Regulations sections 1.882-5T(b)(3) and 1.882-5T(c)(2)(iv). Line 18c. Borrowing rate. Divide line 18a by line 18b. The result is the average worldwide borrowing rate for each separate currency pool. Line 19. Interest expense allocation by separate currency pool. For each column, multiply the amount on line 17b by the borrowing rate on line 18c and enter the result on line 19. The amount on line 19 is the amount of interest expense allocable to ECI in each separate currency pool. Line 20. Total interest expense allocable to ECI under the separate currency pools method. On line 20, enter the sum of the amounts in each column on line 19 (including amounts from line 19 of attached schedule, if any). The amount on line 20 is the total amount of interest expense allocable to ECI under the Separate Currency Pools method. The amount on line 20 does not include any amount of interest expense directly allocable under Temporary Regulations section 1.882-5T(a)(1)(ii).

Lines 21 Through 25. Summary ­ Interest Expense Allocation and Deduction Under Regulations Section 1.882-5
Line 22. Interest expense directly allocable under Temporary Regulations section 1.882-5T(a)(1)(ii). Enter the amount of interest expense directly allocable to ECI under Temporary Regulations section 1.882-5T(a)(1)(ii). A foreign corporation that has a U.S. asset and indebtedness that meet the requirements of Temporary Regulations section 1.861-10T(b) or (c), as limited by Temporary Regulations section 1.861-10T(d)(1), shall directly allocate interest expense from such indebtedness to income from such asset in the manner and to the extent provided in Temporary Regulations section 1.861-10T. Note. 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). Line 23. Total interest expense allocable to ECI under Regulations section 1.882-5. Add lines 21 and 22 and enter the result on line 23. This result is the total amount of interest expense allocable to ECI, including directly allocated interest. This allocable amount may not exceed the total interest expense paid or accrued by the corporation. See Regulations section 1.882-5(a)(3). If the corporation's total interest expense paid or accrued is less than the amount of allocation that would result by adding lines 21 and 22, enter such lesser amount on line 23. The amount entered on line 23 is the amount of interest expense taken into account for branch-level interest tax purposes under section 884(f)(1)(B) and Regulations section 1.884-4(a), regardless of whether the deductibility of such amount is temporarily deferred or disallowed for allocation to tax-exempt income (including treaty exempt income). The amount reportable on line 23 is reconciled and reported on Form 1120-F, Section III, line 7c, and on Schedule M-3 (Form 1120-F), Part III, line 26b, columns (d) and (e). Line 24. Tax-exempt allocations, deferrals and capitalization of interest expense allocation from line 23. The amount of interest expense allocable to ECI entered on line 23 is subject to

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additional rules that may defer or disallow deductibility in whole or in part. Line 24a. Tax-exempt allocations. 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 schedule showing how such allocation between exempt and non-exempt ECI has been made. See Regulations section 1.882-5(a)(5), 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). Note. 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.

Line 24b. Deferred interest expense. Enter on line 24b the amount of allocable interest expense on line 23 that is subject to deferral 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 schedule 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 a schedule.

Line 24c. Capitalized interest expense. Enter on line 24c the amount of interest expense allocation reported on line 23 that is capitalizable under section 263A. Attach a schedule describing how such allocation has been made. Note. 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. Line 24d. Total deferrals and disallowances. 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. Line 25. Amount of allocation deductible on Form 1120-F, Section II, line 18. Combine lines 23 and 24d and enter the result on line 25. The result is the corporation's deductible amount of interest expense allocation for the tax year and is reportable on Form 1120-F, Section II, line 18.

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