Form 1120F and Schedules M-3, H, I & P
Institute of International Bankers
Annual Tax Conference – New York
June 18, 2007
Steven Quint (CALYON Bank): Moderator
Karina Pogrebinsky – KPMG
Lawrence Weinblatt – PWC
Debra Taylor – Ernst & Young
Stuart Zwerling – Deloitte Tax LLP
Paul Epstein – Office of Assoc. Chief Counsel (Int’l ) - IRS
Form 1120F, and Schedules M-3, H, I & P
• Required for Foreign Corporation Tax Years 2007
– E-File will be optional for 2007 year tax returns
• Adopts new schedules
– Schedule M-3 (Corporations with assets > $10 million)
– Schedule H (Home Office and Trade or Business Expense
Allocation - §1.861-8)
– Schedule I (Interest Expense Allocation - §1.882-5)
– Schedule P (Reconciliation of Foreign Partner K-1 to effectively
connected income)
• Coordinates §1.882-5(d)(2) “set(s) of books and records”
for 1120F Schedule L and for new schedules
Form 1120F: Schedule L
Schedule L Books and Records:
• §1.6012-2(g)(1)(iii) permits ECI generating assets and
U.S. based asset reporting
• §1.882-5(d)(2) set(s) of books definition of “U.S.
booked liabilities” is adopted consistent with the
regulation (“Schedule L Books”)
• Interbranch Assets
• Non-U.S. Assets (non-ECI assets)
• U.S. Assets (those includible under §1.884-1(d))
• Interbranch and 3rd Party Liability breakout
• Schedule L Books uniformly used for Form M-3
books, and Schedules H, I & P
• Schedule H – Part IV deductions on trade or
business books allocated and apportioned to
ECI/non-ECI
• Schedule I - §1.882-5 reporting of U.S. booked
liabilities and book expense
• Schedule P – Liabilities on partnership trade or
business books
• Form 1120F, Page 5, Section II – Determination
of branch interest for branch-level interest tax
• Worldwide reporting permitted
Schedule M-3:Net Income (Loss) Reconciliation (1120F)
Financial Statement Identification:
• Audited Statements
• Unaudited Statements
• Trial Balances
• Non-Banks (Worldwide Statement)
• Foreign Banks (Books used for Sched. L)
Part I (Financial Statement Net Income):
• Nonconsolidated Statement (with parent)
• May have subsidiaries consolidated
• Include Disregarded Entities not on
Statement
• Exclude Subsidiaries/Entities in
Consolidation
• Eliminations for inter-company
dividends
• Line 11: Adjusted financial net income
that constitutes the Foreign Corporation
for tax purposes
Schedule M-3:Net Income (Loss) Reconciliation (1120F)
Part II: Reconciliation of Financial Gross
Income in Part I, Line 11 to Taxable Income
• Columns (a) – (c) adjust financial income to
U.S. tax principles before apportionment to
ECI
• Columns (d) & (e) apportion gross income
to ECI and non-ECI• Non-Banks: Column (a) is Worldwide
Gross Income – i.e. column (d) allocates
only to non-ECI
• Foreign Banks: Column (a) is Sched L
books determined under §1.882-5(d)(2)
principles Column (d) may allocate
column (a) amount to non-ECI
• Line 23 special treatment allocates
some offshore booked items to ECI
• New Lines
• Substitute Interest and Dividends
Rec’d (Proprietary Securities Lending)
• Expanded Mark-to-Market categories
• Global Dealing Income
Schedule M-3:Net Income (Loss) Reconciliation (1120F)
Part II: Reconciliation of Financial Gross
Income in Part I, Line 11 to Taxable Income
• Line 23: Foreign Banks Only – Report
ECI not on Schedule L books
• Income/gains - §864(c)(6) and
(c)(7)
• Certain securities attributable to U.S.
office under the material participation
test in §1.864-4(c)(5)(iii)
• Line 28 col. (e) reconciles to 1120F,
line 29
Part III: Reconciliation of Deductions to ECI
• U.S. Source Substitute Interest and
Dividends Paid
• Special Reporting in columns (c) and
(d) for non-ECI amounts not in column
(a) or (e)
• Interest equivalents (e.g. guarantee fees)
• Home Office Allocation – From Sched. H
Schedule M-3:Net Income (Loss) Reconciliation (1120F)
Part III: Reconciliation of Deductions to
ECI
• Interest Expense Reconciliation to
Schedule I
• Amounts Reconcile to total deductions
on Form 1120 F, Line 26
Schedule I: §1.882-5 Interest Expense Allocation
Identification of Step 3 Method
Step 1: US Assets
• Schedule L Books
• Aggregate adjustments (Column (a))
• P’Ship Liabilities (Column (b))
• Other non-Sched L US Assets –
Column (c)
Step 2: US-Connected Liabilities
• Identification of Ratio
• USCL Amount
• Liability Reduction Election
Step 3: U.S. Booked Liabilities/Int.
• §1.882-5(d)(2) booked amount
• Partnership booked liabilities
• Schedule P Carryovers
Schedule I: §1.882-5 Interest Expense Allocation
Step 3: AUSBL Method
• Bank 30-Day LIBOR Election Box
• Actual Excess Interest Rate (if
applicable)
• Scaling Ratio (if applicable)
• Hedging (not reported here)
Step 3: Separate Currency Pools Method
• Handles Four Currencies on Form
• 3% Currency Election Box
• Liability Reduction Election Amount
• WW Avg. Borrowing Rate Ratio
• Deduction by Currency
Summary of Results:
• Allocation under 3-Step Formula
• Directly Allocable Interest
• Adjustments for Deferrals/Tax-Exempt
• Deduction to 1120F, pg. 3, line 18
Schedule H: Deductions Allocated to ECI under §1.861-8
Part I: Direct Allocations
• Identification of Costs
• Adjustments to U.S. Principles
• Direct Allocations to non-ECI
• Residual Deductions
Part II : Indirect Allocations
• Translation to US Dollars
• Total H/O Allocation - Line 21
Part III: Financial Records & Methods
• Gross Income Ratio
• Gross Asset Ratio
• Personnel Headcount Ratio
• Ratios are not safe harbors
Schedule H: Deductions Allocated to ECI under §1.861-8
Part III (cont’d): Financial Records
• Cost Acct’g Reports, etc.
Part IV: Trade or Business Books
• Schedule L Books
• Identification of Costs
• Adjust to U.S. Tax Principles
• Allocable Deduction Pool
Part IV: Schedule L Deductions
Allocable to ECI/non-ECI
• Direct allocations for NPC Exp.
• Direct cost allocations
• Indirect cost allocations
• Reconciles to Form 1120F, pg. 3
Schedule P: Reconciliation of Foreign Partner Income
Part I: List of Foreign Partner Interests
• Report only top tier P’ship Interests
• Attach schedule if over 5 Interests
Part II: Reconciliation of Form K-1 to
ECI, Deductions and Book Interest
Expense:
• Trade or Business Line Gross-ups
• Gross Income
• Non-Interest Expense Deductions
• Other Gross Income
• Other non-Interest Expense
• Interest Expense Groupings
• Trade or Business Lines
• Other Interest Lines
• Directly Allocable Amounts
• Amounts Flow to Schedule I
Schedule P: Reconciliation of Foreign Partner Income
Part III: Partner Outside Basis for Interest
Expense Allocation under §1.882-5:
• Partner Basis under §705
• Identification of direct allocations
• Other Partner Liabilities
•Flows to Schedule I, Line 8, col. (b)
• Adjusted Outside Foreign Partner Basis
• Apportionment of Adj. Outside Basis
•Flows to Schedule I, Line 5, col. (b)
• Identify “Income” or “Asset” Method