2007 Department of the Treasury
Internal Revenue Service
Instructions for Schedule I
(Form 1120-F)
Interest Expense Allocation Under Regulations Section 1.882-5
Section references are to the Internal establishment under application of the
Revenue Code unless otherwise noted. OECD Transfer Pricing Guidelines Exceptions from Filing
principles by analogy. For treaties that Schedule I
expressly provide for such attribution, see
General Instructions Article 7 and the accompanying
A foreign corporation is not required to file
Schedule I if it (a) does not have a trade
Exchange of Notes to the 2001 United or business within the United States, (b)
Purpose of Schedule States-United Kingdom and 2003 United has no worldwide interest expense for the
Schedule I (Form 1120-F) is used to States-Japan Income Tax Treaties. If the tax year to allocate under Regulations
report the amount of interest expense foreign corporation files its tax return section 1.882-5, or (c) conducts limited
allocable to effectively connected income using a treaty-based method of the type activities in the United States for the tax
(“ECI”) and the deductible amount of such provided in these treaties, complete Form year that it determines do not give rise to
allocation for the tax year under section 8833 (and attach it to Form 1120-F) to effectively connected income, or do not
882(c), Regulations section 1.882-5, and disclose the treaty position taken. give rise to a U.S. permanent
Temporary Regulations section 1.882-5T. establishment to which business profits
The schedule also identifies the various Who Must File are attributable, and the corporation files
elections the taxpayer uses, and All foreign corporations that have interest a protective income tax return under
discloses the basic calculations for the expense allocable to ECI under section Regulations section 1.882-4(a)(3)(vi).
year under Temporary Regulations 882(c) must complete Schedule I to report Protective elections on protective
sections 1.882-5T(a)(7) and this allocation, regardless of whether the returns. A corporation that files a
1.882-5T(d)(5), and under the branch amount allocable under Regulations protective tax return on Form 1120-F
profits tax rules of Temporary Regulations section 1.882-5 is deductible in the under Regulations section
section 1.884-1T(e)(3). current year, or is otherwise deferred or 1.882-4(a)(3)(vi) may voluntarily file
Note. The tax elections under permanently disallowed under other Schedule I with the protective return to
Temporary Regulations sections 1.882-5T sections of the Internal Revenue Code preserve timely elections under
and 1.884-1T(e)(3) are not effected under (e.g., sections 163(e), 163(j), 263A, Temporary Regulations section
the regulations by their identification on 265(a), 267(a)(3)). The information 1.882-5T(a)(7) if the return is filed by the
Schedule I (Form 1120-F). See the reported on Schedule I is also needed to original due date (including extensions) of
requirements for the time, place and complete Form 1120-F, Section III (the the corporation’s Form 1120-F. The
manner for making the interest expense determination of the branch-level interest protective elections are not effective if
allocation and branch profits tax liability tax under section 884(f)). Interest filed during the additional extended period
reduction elections for Temporary expense that is treated as “branch described under Regulations section
Regulations sections 1.882-5T(a)(7) and interest” under Regulations section 1.882-4(a)(3). The foreign corporation
1.884-1T(e)(3). 1.884-4(b) may be subject to information need only complete the relevant portions
reporting under section 1461 or section of Schedule I that identify its right to use
Under Regulations section 1.882-5 6049 and potential withholding under the following elections:
and Temporary Regulations section sections 1441 and 1442. A foreign • The Adjusted U.S. Booked Liability
1.882-5T, the amount of interest expense corporation that is a reporting corporation method (“AUSBL”) or Separate Currency
of a foreign corporation that is allocable and required to file Form 1120-F must Pools (“SCP”) method (item B check
under section 882(c) to income which is complete Schedule I and attach it to Form boxes);
effectively connected (or treated as 1120-F. • The adjusted basis or fair market value
effectively connected) with the conduct of method for valuing its average assets in
a trade or business within the United Reporting corporation. A reporting steps 1 and 2 of the computation (line 1
States is the sum of the interest allocable corporation is any foreign corporation that check boxes);
by the foreign corporation under the is engaged in a trade or business or • The fixed or actual ratio in step 2 (line 6
three-step process set forth in paragraphs treated as engaged in a trade or business check boxes);
(b), (c), and (d) or (e) of the regulation within the United States directly or • The published LIBOR election for
and the directly allocated interest indirectly at any time during the tax year. banks under the AUSBL method in Step 3
expense determined under Temporary (line 10 check box); and
Regulations section 1.882-5T(a)(1)(ii). Treaty-based return positions. If the • The de minimis foreign currency
The interest allocation rules of corporation reports its interest expense election under the Separate Currency
Regulations section 1.882-5 and attributable to its business profits of a Pools method in Step 3 (line 16b check
Temporary Regulations section 1.882-5T U.S. permanent establishment pursuant box).
are the exclusive rules for allocating to the express provisions and
interest expense under section 882(c) to accompanying documents of an The corporation need only identify the
effectively connected income and for applicable treaty instead of under protective election in the first year it is
attributing interest expense to business Regulations section 1.882-5, then required to be made under Temporary
profits of a U.S. permanent establishment Schedule I, lines 1 through 9 must be Regulations section 1.882-5T(a)(7) or in
under all income tax treaties other than completed applying the rules of any year a taxpayer is eligible to adopt or
treaties that expressly permit attribution of Regulations section 1.882-5 and attached change an election and chooses to do so
business profits to a U.S. permanent to Form 1120-F. for that year. For example, an election to
Cat. No. 50606A
use the adjusted U.S. booked liability Other Forms and Schedules may instead report its worldwide assets,
method or the separate currency pools Related to Schedule I liabilities, and equity on Schedule L.
method is an election that generally must If the foreign corporation has more
be maintained for a minimum five-year Form 1120-F, Schedule L, and than one set of books and records
period. If a corporation is subject to Schedule M-3 (Form 1120-F). The set relating to assets located in the United
Regulations section 1.882-5 for the first or set(s) of books that give rise to U.S. States or assets used in a trade or
time, the election is due with a timely filed booked liabilities under Regulations business conducted in the United States,
return (excluding the additional extended section 1.882-5(d)(2) and Temporary it must report the combined amounts on
period provided by Regulations section Regulations section 1.882-5T(d)(2) are Schedule L and must eliminate asset and
1.882-4(a)(3)) whether or not the taxpayer the same sets of books and records that liability amounts recorded between these
files a protective return under Regulations are reportable as of the tax year end on books.
section 1.882-4(a)(3)(vi). The protective Form 1120-F, Schedule L. They are also
election need not be filed with subsequent the same sets of books and records that Required Reporting on
protective returns filed under Regulations are used by foreign banks to report Schedule I
section 1.882-4(a)(3)(vi) for any income and expenses on Schedule M-3
(Form 1120-F). Lines 1 through 9. Schedule I requires
subsequent year to which the minimum disclosure of data and interest allocation
five-year period applies. However, the Form 1120-F, Section III, Part II elections for all parts of the three-step
indication of the election with a protective (branch-level interest tax). The amount formula under Regulations section
return is only effective for a year that the of interest expense from Schedule I, line 1.882-5 and Temporary Regulations
corporation is engaged in trade or 24d is reportable on Form 1120-F, section 1.882-5T. On page 1, the
business within the United States. Section III, Part II, line 7b. The amount of corporation is required to complete Step 1
Accordingly, if a protective election is the allocation under Regulations section (lines 1 through 5) to determine its
made for a first year protective return and 1.882-5 reportable on Schedule I, line 23 average U.S. assets, Step 2 (lines 6
in fact the taxpayer is not engaged in is reportable on Form 1120-F, Section III, through 7c) to determine its
trade or business until the second year of Part II, line 7c. U.S.-connected liabilities, and Step 3
activity within the United States, the (lines 8 and 9) to determine its U.S.
protective election made in the first year Schedule M-3 (Form 1120-F), Part III, booked liabilities and U.S. booked interest
is not effective for the corporation’s lines 26b and 26c. The amount of expense under Regulations section
second year of activity because interest expense allocation reportable on 1.882-5(d)(2) and Temporary Regulations
Regulations section 1.882-5 is not Schedule I, line 23 is includable on section 1.882-5T(d)(2). The information
applicable to the corporation until such Schedule M-3 (Form 1120-F), line 26b, on line 9, column (c) is also used for
second year. The elections used by a columns (d) and (e). The amounts subject purposes of determining the corporation’s
taxpayer for all years in which it files Form to deferral and disallowance on Schedule branch interest under section 884(f)(1)(A)
1120-F and reports effectively connected I, lines 24a through 24c are reportable on and Regulations section 1.884-4(b), and
income must be shown on Schedule I, Schedule M-3 (Form 1120-F), line 26c, in the calculation of the corporation’s
including years subsequent to the year in columns (b), (c) and (e). branch-level interest tax on excess
which an election under Temporary interest under section 884(f)(1)(B) and
Regulations section 1.882-5T(a)(7) is Schedule P (Form 1120-F). Enter
amounts from Schedule P (Form 1120-F), Regulations section 1.884-4(a). Line 8,
made. column (c), and line 9, column (c) are also
lines 19, 17 and 14c on Schedule I, line 5,
A corporation that files a protective column (b); line 8, column (b); and line 9, included in the interest expense allocation
return under Regulations section column (b), respectively. computation in Step 3 of the AUSBL
1.882-4(a)(3)(vi) need not enter amounts method if elected by the corporation.
on Schedule I (other than for the Assets and Liabilities Based on Lines 1 through 9 must be
published LIBOR election on line 10d) in Schedule L Set(s) of Books and
order to preserve an allocation method. If Records
! completed by all corporations
CAUTION required to file Schedule I,
a taxpayer files a protective return under regardless of whether the corporation
Regulations section 1.882-4(a)(3)(vi) and Generally, the assets and liabilities
required to be reported on Schedule L are allocates interest expense under the
does not file Schedule I to identify the AUSBL or Separate Currency Pools
relevant elections under Regulations the total assets and liabilities reflected on
the set or sets of books of the foreign method for the applicable year. Schedule
section 1.882-5 for an applicable year, I, lines 1 through 9 must also be
then the Director of Field Operations is corporation that give rise to income
effectively connected with the completed under the rules of Regulations
authorized to make all applicable section 1.882-5 and Temporary
allocation method elections on behalf of corporation’s trade or business within the
United States and to U.S. booked Regulations section 1.882-5T even if the
the corporation for such applicable year if corporation reports business profits
it is later determined that the taxpayer liabilities (as defined in Regulations
section 1.882-5(d)(2) and Temporary attributable to a U.S. permanent
was engaged in trade or business within establishment (other than under the ECI
the United States and had ECI during the Regulations sections 1.882-5T(d)(2)(ii)(A)
and (iii)). The total assets and liabilities rules of sections 864(c), 882(a) and
year. 882(c)) pursuant to the express
reflected on such books include the third
Note. Under Temporary Regulations party U.S. assets (as defined in provisions of an applicable income tax
section 1.882-5T(a)(7), no interest Regulations section 1.884-1(d)) and third treaty and accompanying documents
expense allocation elections may be party liabilities (whether with related or (such as an Exchange of Notes).
made on an amended return. In addition, unrelated parties), as well as the Lines 10 through 20. Allocations,
the relief for late tax elections provided interbranch assets and liabilities and direct interest allocations, deferrals
under the rules of Regulations section assets that give rise to noneffectively and other disallowances. Step 3 of the
301.9100-1 (and any guidance connected income in whole or in part. AUSBL method is provided on lines 10
promulgated thereunder) is not available. Such books reflect the assets of the through 15. Step 3 of the Separate
An election identified on line 1 of a foreign corporation located in the United Currency Pools method is provided on
change from a fair market value method States and all other of its assets used in lines 16 through 21. These Step 3
to a previously elected adjusted basis its trade or business within the United methods are mutually exclusive and
method for reporting U.S. assets is not States (other than its assets giving rise to cannot both apply to the corporation in
effective without advance consent of the effectively connected income under the same year. The methods are subject
Commissioner or his delegate. See sections 864(c)(6) or (7)), as authorized to the general five-year minimum period
Temporary Regulations section under Regulations section election rules of Temporary Regulations
1.882-5T(b)(2)(ii)(A). 1.6012-2(g)(1)(iii). A foreign corporation section 1.882-5T(a)(7).
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AUSBL method filers. AUSBL Note. The reference to the definition of are disregarded for purposes of the
method filers complete all columns on the term “bank” for purposes of interest expense allocation rules.
lines 1 through 15 and lines 21 through determining the U.S. booked liabilities of Note. If under the global dealing
25. Do not complete lines 16 through 20. banks under Regulations section proposed regulations (Proposed
Separate currency pools method 1.882-5(d)(2)(iii) and Temporary Regulations section 1.863-3(h), which
filers. Separate Currency Pools method Regulations section 1.882-5T(d)(iii)(A) references the Proposed Regulations
filers complete all columns on lines 1 requires that the corporation meet the section 1.482-8 principles), the
through 9 and lines 16 through 25. Do not section 585(a)(2) regulated banking corporation recognizes an amount
complete lines 10 through 15. requirements in its trade or business recorded as an interbranch asset, such
Lines 21 through 25. Summary – within the United States. The section amount is treated as the allocation and
Interest expense allocation and 585(a)(2) standard must also be satisfied source of third-party securities dealing
deduction under Regulations section at the corporation’s U.S. trade or income and is not eliminated from U.S.
1.882-5 business level for purposes of electing the assets on line 3a, column (a). Such
deposit liability safe harbor applicable to interbranch assets are eliminated only to
Line 22. Direct interest allocations. the reduction of excess interest under
Interest expense that is directly allocable the extent they are allocated under
Regulations section 1.884-4(a)(2)(iii). Proposed Regulations section 1.863-3(h)
under Temporary Regulations section
1.882-5T(a)(1)(ii) in accordance with the to foreign source non-ECI. The allocable
rules of Temporary Regulations section Lines 1 Through 9: All amount to non-ECI is eliminated from
1.861-10T(b) or (c) is reported on line 22. U.S. assets on line 3c, column (a) (total
Foreign Corporations other non-ECI assets).
Line 23. Summary of Regulations
section 1.882-5 allocation. The amount Lines 1 Through 5. Step 1: Line 3b, column (a). Total non-ECI
of interest expense allocable to effectively Determination of U.S. Assets assets under section 864(c)(4)(D).
connected income under Regulations Enter on line 3b, column (a), the average
Assets includable on lines 1 through 5 are
section 1.882-5 is the sum of the amount assets included on line 2, column (a) that
the U.S. assets of the corporation as
allocated under either the AUSBL or give rise to non-ECI received from
defined in Regulations sections
Separate Currency Pools method on line foreign-related corporations under section
1.882-5(b) and 1.884-1(d), and
15 or 20, and the amount directly 864(c)(4)(D). Such amounts include
Temporary Regulations section
allocated to ECI and reportable on line assets from transactions with
1.882-5T(b). The U.S. assets are valued
22. The resulting amount allocable and foreign-related corporations that give rise
on an average basis for interest expense
reported on line 23 is also reconciled and to foreign source dividends, interest, rents
allocation purposes.
reported on Form 1120-F, Section III, Part or royalties, whether or not such amounts
II, line 7c (branch-level interest tax). Frequency of averaging. The average are attributable to a U.S. office of the
Line 24. Deferrals and value of assets for this step is to be corporation under section 864(c)(5). A
disallowances under other Code computed at the most frequent, regular foreign related corporation is a foreign
sections. The interest expense intervals for which data is reasonably corporation the taxpayer owns (under
allocation reportable on line 23 is available. See Temporary Regulations section 958(a)) or is treated as owning
determined under Regulations section section 1.882-5T(b)(3). For foreign banks, (under section 958(b)) more than 50% of
1.882-5 before application of other Code the minimum averaging period is monthly the total combined voting power of all
sections that defer or disallow the interest (beginning of tax year and monthly classes of stock entitled to vote. Enter the
deduction in whole or in part. See thereafter). For corporations other than a average asset number for assets
Regulations section 1.882-5(a)(5). bank, the minimum averaging period is described in section 864(c)(4)(D) on line
semi-annually (beginning, middle and end 3b, column (a), regardless of whether
of the tax year). such assets give rise to non-ECI under
another Code section or regulation. For
Specific Instructions Line 1. Indicate whether the corporation
values its U.S. assets on the adjusted example, report income that is non-ECI
Item A. Foreign banks. Check the box basis method (see Regulations section under section 864(c)(4)(D) on line 3b,
in item A if the foreign corporation is a 1.882-5(b)(2)(i)) or whether it has elected column (a) even if such income is also not
bank as defined in Temporary the fair market value method (see attributable to a U.S. office of a banking,
Regulations section 1.882-5T(c)(4). The Temporary Regulations section financing or similar business under
term “bank” is defined in the regulation as 1.882-5T(b)(2)(ii)). The adjusted basis Regulations section 1.864-6(b)(2)(ii)(b)
a bank that meets the statutory definition method election is subject to the minimum and the principles of Regulations section
applicable to domestic banks (except for five-year period described in Temporary 1.864-4(c)(5)(ii).
the fact the corporation is foreign) and Regulations section 1.882-5T(a)(7). The Line 3c, column (a). Total other
without regard to whether the fair market value method cannot be non-ECI assets. Enter on line 3c,
corporation’s required banking activities changed to the adjusted basis method column (a), all other assets (or portion
are effectively connected with its trade or without advance consent from the thereof) included on line 2, column (a)
business within the United States. The Commissioner or his delegate. that give rise to domestic or foreign
required banking activities need only be source non-ECI. If income from a security
conducted on a worldwide basis. To Line 2, column (a). Total assets per is treated as partially ECI and partially
qualify as a bank for interest expense books. Enter the total average assets non-ECI under Regulations section
allocation purposes, the foreign derived from the combined set or set(s) of 1.864-4(c)(5)(ii), enter the amount of the
corporation must be subject to bank books that are reportable on Schedule L. asset on line 3, column (c) in the
regulatory supervision and examination in The total average assets includes proportion that the income, gain, or loss
its home country of a type similar to that interbranch balances with other set(s) of from such asset that is treated as
required of domestic banks by a State or books of the corporation that are not non-ECI bears to the total income, gain,
Federal authority having supervision over reportable on Schedule L. or loss from such asset. Do the same for
banking institutions, and a substantial Line 3a, column (a). Total interbranch the non-ECI portion of any asset whose
amount of the corporation’s business assets. Enter on line 3a, column (a), the income is allocated under the proposed
must consist of receiving deposits and total of the corporation’s average global dealing regulations or under an
making loans and discounts, or of interbranch assets included on line 2, Advance Pricing Agreement pursuant to a
exercising fiduciary powers similar to column (a). The average interbranch competent authority agreement. See
those permitted to national banks under assets recorded on the set(s) of Schedule Proposed Regulations sections
authority of the Comptroller of the L books do not create U.S. assets under 1.884-1(d)(2)(vii) and 1.884-1(d)(2)(xi),
Currency. See sections 581 and 585(a). Regulations section 1.882-5(b)(1)(iv) and Example 8.
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Line 3d, column (a). Adjustments for Regulations section 1.884-1(d). Assets attributable to a U.S. office of a banking,
amounts from partnerships and certain includable on this line may include, for financing or similar business under
disregarded entities included on line 2, example, amounts with respect to Regulations section 1.864-4(c)(5)(iii) that
column (a). With respect to amounts securities that are marked to market for are booked in a foreign bank’s home
from partnerships included on line 2, tax purposes under section 475 that are office or other foreign location. Other
column (a), all such amounts must be not marked to market on the set(s) of assets reportable on line 5, column (c),
“backed out” on this line 3d, column (a). books reported on line 2, column (a). If may generally also include assets that are
Enter on line 3d, column (a), all amounts the mark-to-market amount includable for no longer held in connection with a trade
on the Schedule L books for investments tax purposes is an increase to the basis or business within the United States that
in partnerships (whether recorded as an of the assets included on line 2, column give rise to effectively connected income
investment in the partnership interest or in (a), include such increase as a negative under section 864(c)(6) or section
the partnership assets) included on line 2, number on line 3f, column (a). Similarly, if 864(c)(7). However, not all assets that
column (a). the mark to market amount decreases the give rise to ECI, including ECI recognized
Note. Partnership interests are reported basis of the assets included on line 2, under section 864(c)(7), constitute U.S.
in Step 1 as follows: The ECI portion of column (a), include such decrease as a assets under Regulations section
the corporation’s adjusted outside basis in positive number on line 3f, column (a). 1.884-1(d). See Regulations section
a partnership (from Schedule P (Form Other adjustments for book tax 1.884-1(d)(2)(xi), example 5, and
1120-F), line 19, “Total” column) is differences with respect to asset values Regulations section 1.884-1(d)(5).
entered on Schedule I (Form 1120-F), line on line 2, column (a), such as Line 5, column (d). Total average value
5, column (b). depreciation and amortization for of U.S. assets included in Step 1.
taxpayers using the adjusted basis Combine the amounts on line 5, columns
With respect to amounts from method for valuing U.S. assets, are also
disregarded entities included on line 2, (a), (b) and (c) and enter the amount on
reportable on line 3f, column (a). Enter an line 5, column (d). This amount is the total
column (a), enter on line 3d, column (a) aggregate net increase as a negative
any adjustment needed to reflect the average value of the corporation’s U.S.
number. Enter an aggregate net decrease assets included in Step 1 of the
following: Investments in disregarded as a positive number.
entities should not be included on line 2, Regulations section 1.882-5 formula. If
column (a) if the set(s) of books are Line 4, column (a). Combine lines 3a the corporation uses the Separate
reportable on Schedule L. Instead, the through 3f and enter the result on line 4, Currency Pools method to allocate
total assets of such disregarded entity’s column (a). The result on line 4, column interest expense in Step 3 of the
Schedule L books should be combined on (a) constitutes the total net adjustment to Regulations section 1.882-5 formula, see
line 2, column (a) with all other set(s) of the average book assets from the the instructions for line 16a on page 6.
books reportable on Schedule L. If Schedule L set(s) of books reported on The amount on line 5, column (d) is also
another Schedule L book reflects an line 2, column (a). reportable on Schedule H (Form 1120-F),
investment in a disregarded entity whose line 23a.
Line 5. Total Value of U.S. Assets
books are not reportable on Schedule L, for the Tax Year Lines 6 Through 7c. Step 2:
then the assets of the disregarded entity Determination of
are not reported on line 2, column (a). Line 5, column (a). Average U.S. assets
The amount of the investment in the on set(s) of Schedule L books. U.S.-Connected Liabilities -
disregarded entity that is included in the Subtract the amount on line 4, column (a) Regulations Section 1.882-5(c)
total assets reported on line 2, column (a) from line 2, column (a) and enter the Line 6. Actual ratio or fixed ratio
must be reversed on line 3d, column (a) amount on line 5, column (a). The method. Check the applicable box to
to reflect its disregarded treatment in resulting amount is the total average specify whether the corporation uses the
section 1.882-5. value of U.S. assets under Regulations actual ratio or the fixed ratio method for
Line 3e, column (a). Adjustments for section 1.884-1(d) included on the the tax year to determine its
assets that give rise to direct interest Schedule L set(s) of books, excluding any U.S.-connected liabilities in Step 2 of the
expense allocations under Temporary partnership interests included on line 2. allocation formula. The amount of
Regulations section 1.882-5T(a)(1)(ii). Line 5, column (b). ECI portion of the U.S.-connected liabilities is the total value
Enter on line 3e, column (a), the average average value of partnership interests. of U.S. assets for the tax year (line 5,
value of the portion of all assets included Enter on line 5, column (b), the amount column (d)) multiplied by the actual ratio
on line 2 that give rise to direct interest from Schedule P (Form 1120-F), line 19 or the applicable fixed ratio the
expense allocations under Temporary (“Total” column). This amount is the sum corporation has timely elected and is
Regulations section 1.882-5T(a)(1)(ii) in of all ECI portions of the corporation’s eligible to use for the tax year. The actual
accordance with the requirements of outside basis in partnership interests as ratio or fixed ratio election must be made
Temporary Regulations section adjusted under Regulations section on a timely tax return for the first year the
1.861-10T(b) or (c), and Temporary 1.884-1(d)(3). The amount entered from corporation is subject to Regulations
Regulations section 1.861-10T(d). A Schedule P, line 19 may include the ECI section 1.882-5 and is subject to the
foreign corporation that allocates its portion of the corporation’s outside basis minimum five-year period under
interest expense under the direct in partnerships whose book value is Temporary Regulations section
allocation rules shall reduce the basis of included on line 2, column (a) as well as 1.882-5T(a)(7). An election to change the
the asset that meets the requirements of the ECI portion of partnership interests method after such minimum five-year
Temporary Regulations section whose book value is not recorded on the period is also subject to the minimum
1.861-10T (b) or (c) by the principal Schedule L books and is not included on five-year period.
amount of the indebtedness that meets line 2, column (a). Actual ratio information. If the
the requirements of Temporary Line 5, column (c). Average U.S. assets corporation uses the actual ratio,
Regulations section 1.861-10T (b) or (c). not includable in set(s) of books complete lines 6a through 6c and skip line
The amount of directly allocable interest reported on Schedule L, line 5 column 6d.
under Temporary Regulations section (a), or from partnerships reported on Fixed ratio information. If the
1.882-5T(a)(1)(ii) is reported on line 22. line 5, column (b). Enter on line 5, corporation uses the fixed ratio, skip lines
Line 3f, column (a). Other adjustments column (c), the average value of U.S. 6a through 6c and enter the applicable
to average assets included on line 2. assets (other than the ECI portion of the fixed ratio on line 6d. For foreign banks
Enter on line 3f, column (a), the average corporation’s outside basis in partnership (described in Temporary Regulations
asset balances for any other amounts interests) from set(s) of books that are not section 1.882-5T(c)(4)), the fixed ratio is
included on line 2, column (a) that do not reportable on Schedule L. Such assets 95%. For corporations other than foreign
constitute U.S. assets as defined in may generally include certain securities banks, the fixed ratio is 50%.
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Actual Ratio Filers — Regulations manner for making the liability reduction 1.882-5T(d)(2)(ii)(A)(2) and (3). Liabilities
Section 1.882-5(c) election and the separate disclosures reflected on the Schedule L books must
required to be attached to Form 1120-F be recorded on such books reasonably
Line 6a. Average worldwide liabilities. for each liability reduction election made. contemporaneous to the time the liability
Enter on line 6a the average worldwide is incurred.
If the corporation uses the Separate
liabilities as adjusted for U.S. tax
Currency Pools Method for Step 3 (lines
• Foreign banks. The liability recorded
principles for the year. The corporation’s on the set(s) of Schedule L books must
worldwide liabilities include the liabilities 16 through 20), the amount included on
be that of a foreign bank that conducts
of only the corporation filing the Form line 7b must also be allocated to
regulated banking operations in the
1120-F, plus the corporation’s share of determine the U.S.-connected liabilities
United States as described in section
partnership liabilities and any liabilities of for each currency. See the instructions for
585(a)(2)(B). Note: This requirement
any disregarded entities that are treated lines 7c and 17b below. If no liability
applies only for the determination of U.S.
as liabilities of the foreign corporation reduction election is made for the tax
booked liabilities and corresponding U.S.
under U.S. tax principles. The books of year, enter -0- on line 7b.
booked interest expense. It does not
the foreign corporation and any such Line 7c. U.S.-connected liabilities. apply for other purposes such as
disregarded entities must be combined, Subtract line 7b from line 7a and enter the determining the eligibility for the fixed
with applicable eliminating entries for amount on line 7c. The amount entered is ratio under Step 2, reportable on line 6d.
transactions between them. See the amount of U.S.-connected liabilities The liability must be recorded on the
Regulations section 1.882-5(c)(2)(viii). for purposes of determining the amount of Schedule L books before the close of the
The classification of the worldwide interest expense allocable to effectively day on which the liability is incurred
liabilities is determined under U.S. tax connected income in Step 3. If the unless an inadvertent error is shown
principles. See Regulations section corporation uses the Separate Currency under the facts and circumstances. See
1.882-5(c)(2). The value of the worldwide Pools Method for Step 3, the sum of all the definition and requirements for U.S.
liabilities must be determined U.S.-connected liabilities shown on line booked liabilities of foreign banks under
substantially in accordance with U.S. tax 17b (including any attachments for lines Regulations section 1.882-5(d)(2)(iii)(B)
principles. Foreign banks must average 16 through 19 for additional separate and Temporary Regulations section
the worldwide liabilities using the currency pool computations) must equal 1.882-5T(d)(2)(iii)(A). Note: The section
beginning, middle and end of year values. the amount shown on line 7c after the 585(a)(2)(B) standard also applies for
Corporations other than banks must liability reduction election has been taken eligibility to reduce excess interest using
average the worldwide liabilities using the into account. the deposit liability safe harbor under the
year-to-year values of its liabilities. branch-level interest tax on excess
Line 6b. Average worldwide assets. Lines 8 and 9. Step 3: Interest interest under Regulations section
Enter the average worldwide assets as Expense Allocation (Including 1.884-4(a)(2)(iii).
adjusted for U.S. tax principles on line 6b, U.S. Booked Liabilities and U.S. Line 8, column (b). U.S. booked
using the same nonconsolidated books Booked Interest Expense liabilities of partnership interests.
for reporting average worldwide liabilities Included in the Determination Enter on line 8, column (b), the amount
on line 6a. Transactions with disregarded from Schedule P, line 17 (“Total” column).
entities included in the actual ratio of Branch Interest)
This amount is the corporation’s average
computation constitute interbranch U.S. booked liabilities with respect to its
transactions under U.S. tax principles and
Line 8. Average Third Party
U.S.-Booked Liabilities distributive share of liabilities during the
must be eliminated. See Regulations averaging period from partnerships
section 1.882-5(c)(2)(viii). Use the same Line 8, column (a). Schedule L U.S. engaged in trade or business within the
averaging period applicable to worldwide booked liabilities. Enter on line 8, United States. The amount reportable on
liabilities. If the corporation uses the column (a), the average amount of line 8, column (b), and Schedule P is the
actual ratio method, the amount entered third-party U.S.-booked liabilities from the corporation’s share of partnership
on line 6b is also reported on Schedule H set(s) of books reportable on Schedule L liabilities for which it is allocated a
(Form 1120-F), line 23b. using the most frequent averaging period distributive share of interest expense. See
available but not less frequently than the Regulations section 1.884-1(d)(3)(vi).
Fixed Ratio Filers — Temporary minimum averaging periods required for
Regulations Section 1.882-5T(c)(4) U.S. assets reported on line 5. The Line 9. U.S. Booked Interest
Line 7a. U.S.-connected liabilities average U.S.-booked liabilities include all Expense
before Regulations section third-party liabilities on the set(s) of
Schedule L books whether interest Line 9, column (a). Schedule L booked
1.884-1(e)(3) election(s). Multiply the interest expense. Enter the amount of
average U.S. assets from line 5, column bearing or not. Exclude interbranch
liabilities shown on the Schedule L books third-party interest expense from the
(d), by the ratio entered on line 6e and Schedule L set(s) of books with respect to
enter the result on line 7a. The result is unless such amounts are treated as
allocations of third-party amounts with liabilities reported on line 8, column (a).
the amount of U.S.-connected liabilities Do not include interest expense that is
determined before the application of any respect to a global dealing operation
under Proposed Regulations section directly allocable under Temporary
liability reduction election(s) made under Regulations section 1.882-5T(a)(1)(ii),
Regulations section 1.884-1(e)(3) and 1.863-3(h) (e.g., mark-to-market
valuations of dealer derivative securities including the corporation’s distributive
Temporary Regulations section share of direct interest expense
1.884-1T(e)(3). may constitute liabilities that are treated
as U.S. booked liabilities includable on allocations from partnerships otherwise
Line 7b. U.S. liability reduction election line 8, column (a)). Do not include liability reportable in column (b). All direct interest
amount. Enter the total amount of all amounts on line 8a to the extent they give expense allocations to ECI are reported
liability reduction election amounts made rise to directly allocable interest under on line 22.
under Regulations section 1.884-1(e)(3) Temporary Regulations section Line 9, column (b). U.S. booked
and Temporary Regulations section 1.882-5T(a)(1)(ii) or are partnership interest expense from partnerships.
1.884-1T(e)(3). liabilities includable in column (b). Enter on line 9, column (b), the amount
Note. A liability reduction election may • Corporations other than banks. The from Schedule P (Form 1120-F), line 14c
be made only to the extent needed to definition of U.S. booked liability for a (“Total” column). Do not include interest
reduce a dividend equivalent amount corporation other than a bank is expense that is directly allocable under
under section 884 to zero. See described in Regulations section Temporary Regulations section
Temporary Regulations section 1.882-5(d)(2)(ii) and Temporary 1.882-5T(a)(1)(ii) from the corporation’s
1.884-1T(e)(3) for the time, place and Regulations sections distributive share of a partnership’s direct
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interest expense allocations. All direct Line 10b. Enter on line 10b, the average item in accordance with its
interest expense allocations to ECI are worldwide U.S. dollar denominated characterization and the scaled down
reported on line 22. liabilities (whether or not interest bearing) hedging income, expense, gain or loss is
that are not U.S. booked liabilities reported on Form 1120-F, Section II in the
Line 9, column (c). Total U.S. booked included on line 8, column (c). See appropriate category to which the hedging
interest expense. Add the amounts on Temporary Regulations section item is characterized. For instance,
line 9, column (a), and line 9, column (b) 1.882-5T(d)(5)(ii). periodic expense from an interest rate
and enter the result on line 9, column (c). notional principal contract hedging
This result is also required to be reported Line 12. Excess interest. Multiply the
rate on line 10e by the amount of excess transaction that is recorded on the sets of
on Form 1120-F, Section III, line 8. This books reportable on Schedule L, and that
amount is the corporation’s tentative U.S.-connected liabilities on line 11 and
enter the result on line 12. This amount is is subject to the scaling ratio, is reported
branch interest for purposes of the on Form 1120-F, line 27. Such amount is
branch-level interest tax under the corporation’s excess interest expense
portion of its overall Regulations section also subject to reporting on Schedule H
Regulations section 1.884-4(b). See the (Form 1120-F), Part IV, line 39a as
instructions for Form 1120-F, Section III, 1.882-5 allocation that is allocable to
effectively connected income under the allocable in part to ECI and in part to
Part II, line 8. non-ECI in accordance with the scaling
AUSBL method in Regulations section
1.882-5(d)(5). The amount on line 12 also ratio of this line 14b.
Lines 10 Through 15. Step constitutes the corporation’s excess
3: Adjusted U.S. Booked interest under section 884(f)(1)(B). See Lines 16 Through 20. Step
Regulations section 1.884-4(a)(2).
Liabilities Method Line 13. Interest expense allocation. 3: Separate Currency
If the amount on line 7c exceeds the Add the amount reported on line 12 and Pools Method
amount on line 8, column (c), the the amount of U.S. book interest expense Corporations that allocate interest
corporation has “excess interest” as from line 9, column (c) and enter the expense under a Separate Currency
defined in section 884(f)(1)(B). Complete result on line 13. This amount is the Pools election report the allocations under
lines 10 through 13, and skip lines 14a corporation’s total amount of interest a three-step method for each currency in
and 14b. If the amount on line 7c is less expense allocable under the three-step which the corporation has U.S. assets (as
than or equal to the amount on line 8, formula when U.S.-connected liabilities defined in Regulations section
column (c), skip lines 10 through 13, and exceed U.S. booked liabilities under the 1.884-1(d)), on Schedule I, lines 16
complete the determination of the scaling AUSBL method. It does not include any through 20. The amount of the interest
ratio on lines 14a and 14b. amounts directly allocable to effectively expense allocation is the sum of the
connected income under Temporary separate interest expense allocations in
Lines 10 Through 13. Regulations section 1.882-5T(a)(1)(ii). each currency. If the corporation makes a
Computation of AUSBL Method Lines 14a Through 15. 3% currency election under Regulations
Allocation with Excess Interest Computation of AUSBL Method section 1.882-5(e)(1)(i), check the box on
Allocation Under the line 16b and include the U.S. dollar value
Line 10. 30-day LIBOR election for
of all currencies for which the 3%
banks. If the corporation is a foreign Scale-Down Ratio currency election applies in the U.S.
bank that elects to compute excess If U.S.-connected liabilities on line 7c are dollar denominated column on line 16a.
interest under the AUSBL method using equal to or less than U.S.-booked
the 30-day published U.S. dollar LIBOR liabilities on line 8, column (c), the AUSBL Schedule I accommodates reporting of
rate for the tax year, check the box on line method allocation is subject to a the interest expense allocations in four
10 and skip lines 10a through 10c. Enter “scale-down” of the U.S. booked interest currencies (including the U.S. dollar and
the published 30-day U.S. dollar LIBOR expense reported on line 9, column (c). the foreign corporation’s functional
rate on line 10d. See Temporary Complete lines 14a and 14b in lieu of currency). If the foreign corporation has
Regulations section 1.882-5T(d)(5)(ii)(B) lines 10 through 13. If line 7c exceeds line U.S. assets in more than four currencies
for the requirements and separate 8, column (c), leave lines 14a and 14b that are not subject to a 3% currency
statement required to be attached to a blank. election, attach separate sheets using the
timely filed Form 1120-F. The 30-day same size and format as shown on the
LIBOR election does not apply to Line 14b. Scaled-down U.S. book
interest. Multiply the amount of U.S. schedule and provide the information
corporations other than foreign banks. For requested on lines 16 through 19 on the
this purpose, the corporation is eligible to booked interest on line 9, column (c), by
the scale-down ratio on line 14a, and attached sheets for all such additional
make the 30-day U.S. dollar LIBOR currencies. Report on Schedule I, line 20,
election under the same standard that enter the result on line 14b. The allocated
amount is the total amount of the AUSBL column (d), the total results for all
qualifies the corporation as a bank eligible separate currency allocations shown on
to make the 95% fixed ratio election in method allocation under Regulations
section 1.882-5(d)(4). The amount on line line 19 for columns (a) through (d), plus
Temporary Regulations section any additional line 19 amounts shown on
1.882-5T(c)(4). If a protective return is 14b does not include any amount directly
allocable to ECI under Temporary attached separate sheets (if any).
filed, see the instructions for making a
protective 30-day LIBOR election on Regulations section 1.882-5T(a)(1)(ii). Line 16a. U.S. Assets — U.S. dollar
Schedule I filed with the protective return. Hedging amounts. If the corporation value denominated in currency. Enter
has income, expense, gain or loss from a the U.S. dollar value of the average
Lines 10a Through 10c. Excess hedging transaction of a U.S. booked amount of U.S. assets in the appropriate
Interest – Average Actual U.S. liability that gives rise to interest expense column (a) through (d) (or on the attached
subject to the scale-down ratio, such separate sheets for additional currencies).
Dollar Rate hedging income, expense, gain or loss Enter in column (a), the U.S. dollar
Line 10a. Actual U.S. dollar interest. If amount is also subject to reduction under denominated U.S. assets plus the U.S.
the corporation does not properly make or the same scaling ratio reported on line dollar value of any U.S. assets for which a
is not eligible to make a 30-day LIBOR 14a. See Regulations section 3% currency election is applicable for the
election for the tax year, enter the interest 1.882-5(d)(4) and Proposed Regulations tax year. In column (b), enter the average
expense paid or accrued by the section 1.882-5(d)(2)(vi). Do not report U.S. dollar value of U.S. assets
corporation for the tax year on its average such scale-down reductions of denominated in the corporation’s home
worldwide U.S. dollar liabilities, excluding hedging income, expense, gains or country functional currency. Enter the
U.S.-booked liabilities included on line 8, losses on line 14b. The ratio reported on average U.S. assets of all other currency
column (c). line 14a shall be applied to each type of pools beginning with column (c).
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Note. The sum of all U.S. assets in Schedule L books and reportable on section 1.861-10T(b) or (c), as limited by
columns (a) through (d) (and in any Schedule I, line 9, column (c). Temporary Regulations section
columns shown on any attached separate Line 18b. Worldwide average liabilities 1.861-10T(d)(1), shall directly allocate
sheets) must equal the total average U.S. in each separate currency pool. Enter interest expense from such indebtedness
assets entered on line 5, column (d). on line 18b, the average liabilities to income from such asset in the manner
A transaction that hedges a U.S. asset (whether or not interest bearing) and to the extent provided in Temporary
is taken into account for purposes of denominated in each separate currency Regulations section 1.861-10T.
determining the currency denomination pool. In column (a), enter the average Note. See Temporary Regulations
and the value of the U.S. asset. See worldwide liabilities (whether or not section 1.861-10T(d) for rules requiring
Regulations section 1.882-5(e)(1)(i). interest bearing) denominated in U.S. reductions in basis to assets required by
Line 17b. U.S.-connected liabilities per dollars. For all other separate currency the direct interest allocation rules in
currency. Complete line 17b as follows: pools, enter the average amount of Temporary Regulations section
liabilities (whether or not interest bearing) 1.861-10T(b) or (c). The rules of
Determination of U.S.-connected
denominated in the currency of the Temporary Regulations section
liabilities if no U.S. liability reduction
currency pool. Do not enter the U.S. 1.861-10T(c) apply only to non-financial
election is made. For each applicable
dollar value of the currency pool for any institutions. Financial institutions are
column, multiply the U.S. assets on line
column other than column (a). In permitted to directly allocate interest
16a by the U.S.-connected liability ratio
determining the average worldwide expense only under the non-recourse
on line 17a and enter the amount on line
borrowing rate, the liabilities in each indebtedness rules described in
17b. The resulting amount constitutes the
currency pool include the amounts Temporary Regulations section
U.S.-connected liabilities for each
recorded on the sets of books reportable 1.861-10T(b).
currency pool when the corporation does
not make a U.S. liability reduction election on Schedule L and included on Schedule Line 23. Total interest expense
under Regulations section 1.884-1(e)(3) I, line 8, column (c). Determine the allocable to ECI under Regulations
and Temporary Regulations section average third-party liabilities using the section 1.882-5. Add lines 21 and 22
1.884-1T(e)(3). most frequent averaging period for which and enter the result on line 23. This result
data is reasonably available in is the total amount of interest expense
Determination of U.S.-connected accordance with the principles of
liabilities if a U.S. liability reduction allocable to ECI, including directly
Temporary Regulations sections allocated interest. This allocable amount
election is made. If the corporation 1.882-5T(b)(3) and 1.882-5T(c)(2)(iv).
makes one or more U.S. liability reduction may not exceed the total interest expense
elections for the tax year under Line 18c. Borrowing rate. Divide line paid or accrued by the corporation. See
Regulations section 1.884-1(e)(3) and 18a by line 18b. The result is the average Regulations section 1.882-5(a)(3). If the
Temporary Regulations section worldwide borrowing rate for each corporation’s total interest expense paid
1.884-1T(e)(3), the total amount of the separate currency pool. or accrued is less than the amount of
liability reduction shown on line 7b must allocation that would result by adding
Line 19. Interest expense allocation by
be allocated to each of the separate lines 21 and 22, enter such lesser amount
separate currency pool. For each
currency pools in proportion to the U.S. on line 23. The amount entered on line 23
column, multiply the amount on line 17b
assets in each pool. The amount entered is the amount of interest expense taken
by the borrowing rate on line 18c and
on line 17b for each column is computed into account for branch-level interest tax
enter the result on line 19. The amount on
as: purposes under section 884(f)(1)(B) and
line 19 is the amount of interest expense Regulations section 1.884-4(a),
1. The amount on line 16a multiplied allocable to ECI in each separate regardless of whether the deductibility of
by the ratio on line 17a, less currency pool. such amount is temporarily deferred or
2. The amount of the liability reduction Line 20. Total interest expense disallowed for allocation to tax-exempt
election entered on line 7b multiplied by allocable to ECI under the separate income (including treaty exempt income).
the proportion that the average U.S. currency pools method. On line 20, The amount reportable on line 23 is
assets in the separate currency pool enter the sum of the amounts in each reconciled and reported on Form 1120-F,
bears to all of the U.S. assets in all column on line 19 (including amounts Section III, line 7c, and on Schedule M-3
separate currencies (i.e., the total from line 19 of attached schedule, if any). (Form 1120-F), Part III, line 26b, columns
average U.S. assets entered on line 5, The amount on line 20 is the total amount (d) and (e).
column (d)). of interest expense allocable to ECI under Line 24. Tax-exempt allocations,
Attach a schedule showing the the Separate Currency Pools method. deferrals and capitalization of interest
computation and the allocation of the The amount on line 20 does not include expense allocation from line 23. The
liability reduction election to each any amount of interest expense directly amount of interest expense allocable to
separate currency pool. allocable under Temporary Regulations ECI entered on line 23 is subject to
section 1.882-5T(a)(1)(ii). additional rules that may defer or disallow
Line 18a. Worldwide book interest
expense for each separate currency deductibility in whole or in part.
pool. Enter for each column on line 18a, Lines 21 Through 25. Line 24a. Tax-exempt allocations.
the corporation’s worldwide interest Summary – Interest Enter on line 24a the amount of allocable
expense paid or accrued for the tax year interest expense on line 23 that is subject
in the separate currency pool. In column Expense Allocation and to further allocation and apportionment to
(a), enter the worldwide U.S. dollar Deduction Under tax-exempt income under section 265 or
interest paid or accrued. For all other under the provisions of an applicable
separate currency pools, enter the Regulations Section income tax treaty. Attach a schedule
worldwide interest expense in the showing how such allocation between
functional currency of the currency pool.
1.882-5 exempt and non-exempt ECI has been
Do not enter the U.S. dollar value of the Line 22. Interest expense directly made. See Regulations section
functional currency pool in column (b) or allocable under Temporary 1.882-5(a)(5), examples (3) and (4).
for any other non-U.S. dollar currencies Regulations section 1.882-5T(a)(1)(ii). Treaty-exempt income may include
for which a separate currency pool Enter the amount of interest expense income that is ECI under the force of
allocation is made in additional columns. directly allocable to ECI under Temporary attraction principle of section 864(c)(3)
See Regulations section 1.882-5(e)(2). Regulations section 1.882-5T(a)(1)(ii). A but which is business profits not
The worldwide interest expense in each foreign corporation that has a U.S. asset attributable to a U.S. permanent
currency pool includes interest expense in and indebtedness that meet the establishment of the corporation under an
each currency that is recorded on the requirements of Temporary Regulations applicable treaty to which Regulations
-7-
section 1.882-5 applies in determining the current year deduction of a prior year treated as a reduction of the allocation in
attributable business profits. For such deferral for each applicable provision. If determining the deductible interest
treaties, the amount allocable to ECI the amount of current year deferrals of expense for the year.
reported on line 23 requires additional the interest expense allocated and Line 24d. Total deferrals and
allocation and apportionment between reported on line 23 exceeds the current disallowances. Combine lines 24a, 24b
taxable ECI and treaty-exempt ECI under year amount of the deductible amount of and 24c, and enter the result on line 24d.
Regulations section 1.882-5(a)(5). prior year interest deferrals, enter the The amount entered on line 24d is also
Note. Enter all amounts on line 24a as a excess current year deferral as a negative reported and reconciled for its temporary
negative amount. These line 24a amounts number on line 24b. If the current year and permanent differences on Schedule
are a reduction of the allocation in deductible amount of prior year deferrals M-3 (Form 1120-F), Part III, line 26c,
determining the deductible interest exceeds the current year deferrals, enter columns (b) and (c). See the instructions
expense for the year. the excess deductible amount over the for Schedule M-3 (Form 1120-F), Part III,
current year deferrals as a positive line 26c.
Line 24b. Deferred interest expense.
number on line 24b.
Enter on line 24b the amount of allocable Line 25. Amount of allocation
interest expense on line 23 that is subject Line 24c. Capitalized interest deductible on Form 1120-F, Part II, line
to deferral under sections 163(e)(3), expense. Enter on line 24c the amount 18. Combine lines 23 and 24d and enter
163(j) or 267(a)(3) in the current tax year. of interest expense allocation reported on the result on line 25. The result is the
Also enter on line 24b the amount of line 23 that is capitalizable under section corporation’s deductible amount of
allocable interest expense deferred under 263A. Attach a schedule describing how interest expense allocation for the tax
any of these sections in a prior year that such allocation has been made. year and is reportable on Form 1120-F,
is deductible in the current taxable year. Note. Enter all amounts on line 24a as a Part II, line 18.
Attach a schedule indicating the amount negative amount. These amounts are
of current year deferral and the amount of
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