[Federal Register Volume 74, Number 186 (Monday, September 28, 2009)]
[Rules and Regulations]
[Pages 49315-49320]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-22867]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9465]
RIN 1545-BF71
Determination of Interest Expense Deduction of Foreign
Corporations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
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SUMMARY: This document contains final regulations under section 882(c)
of the Internal Revenue Code (Code) concerning the determination of the
interest expense deduction of foreign corporations engaged in a trade
or business within the United States. These final regulations conform
the interest expense rules to recent U.S. Income Tax Treaty agreements
and adopt other changes to improve compliance.
DATES: These final regulations are effective September 28, 2009.
FOR FURTHER INFORMATION CONTACT: Anthony J. Marra, (202) 622-3870 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545-2030. Responses to this collection
of information are mandatory. The collection of information in these
final regulations is in Sec. 1.884-1(e)(3)(iv). This information is
required by the IRS to allow a taxpayer to reduce U.S. liabilities to
the extent necessary to prevent the recognition of a dividend
equivalent amount.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.
Books and records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
[[Page 49316]]
Background
On August 17, 2006, the Treasury Department and the IRS published
TD 9281 (71 FR 47443-01, 2006-2 CB 517) (the temporary regulations)
under section 882(c) of the Internal Revenue Code regarding the
determination of a foreign corporation's interest expense allocable to
income effectively connected with the conduct of a trade or business
within the United States. On the same day, a notice of proposed
rulemaking (REG-120509-06, 71 FR 47459, 2006-2 CB 570) was published by
cross-reference to the temporary regulations in the Federal Register.
See Sec. 601.601(d)(2)(ii)(b).
Section 1.882-5 generally requires a foreign corporation to use a
three-step calculation to determine the amount of interest expense that
is allocable under section 882(c) to income effectively connected (or
treated as effectively connected) with the foreign corporation's
conduct of a trade or business within the United States. The notice of
proposed rulemaking (the proposed regulations) provided for certain
changes in the three-step calculation. First, the proposed regulations
revised the election to use fair market value rather than adjusted
basis in valuing U.S. assets in Step 1. That revision required the
taxpayer to use fair market valuations for both Step 1 purposes and the
entire determination of the actual ratio in Step 2. The proposed
regulations also revised the Step 2 elective fixed ratio for foreign
banks, allowing a 95 percent fixed ratio to be used in lieu of the
actual ratio. In Step 3, the proposed regulations allowed a foreign
bank with excess U.S.-connected liabilities over U.S.-booked
liabilities under the adjusted U.S. booked liabilities (AUSBL) method
to elect to use the 30-day London Interbank Offering Rate (LIBOR) to
calculate interest on the excess U.S.-connected liabilities.
In addition to the changes in the three-step calculation, the
proposed regulations implemented guidance provided in Notice 2005-53
(2005-32 IRB 263, 2005-2 CB 263) regarding the interaction of Sec.
1.882-5 and U.S. income tax treaties in recognition that recent
treaties expressly permit taxpayers to determine attribution of
business profits to a permanent establishment by analogy to the 1995
Organisation for Economic Co-operation and Development Transfer Pricing
Guidelines (Authorized OECD Approach). For purposes of applying the
branch profits tax, the proposed regulations expanded the election
under Sec. 1.884-1 to allow a taxpayer to reduce U.S. liabilities to
the extent necessary to prevent the recognition of a dividend
equivalent amount, but not below zero. Finally, the proposed
regulations clarified the application of the 1996 final regulations
under Sec. 1.882-5 with respect to certain direct interest
allocations, the definition of U.S.-booked liabilities, and the
treatment of certain currency gain and loss for purposes of Sec.
1.882-5. The preamble of TD 9281 includes background information with
respect to the proposed regulations and a further explanation of these
provisions. See Sec. 601.601(d)(2)(ii)(b).
The IRS received written comments in response to the proposed
regulations. No requests to speak at a public hearing were received and
no hearing was held. After consideration of the comments received, the
proposed regulations are adopted without substantive change by this
Treasury decision, and the corresponding temporary regulations are
removed. To relieve taxpayers of the burden of duplicative reporting,
these final regulations coordinate the various elections provided in
the three-step formula with the filing of taxpayer's Schedule I (Form
1120-F). Taxpayers filing protective tax returns under Sec. 1.882-
4(a)(3)(vi) may make Sec. 1.882-5 protective elections by attaching
Schedule I to a timely filed return (including extensions). Taxpayers
must separately attach to the Form 1120-F, any election to reduce U.S.
liabilities for branch profits tax purposes as permitted by Sec.
1.884-1(e)(3). A taxpayer's Schedule I must reflect the cumulative
amount of all U.S. liability reductions.
Many of the comments received raised issues specific to certain
financial transactions that require broader considerations than the
interaction of Sec. 1.882-5 and those financial transactions. The
Treasury Department and the IRS received a number of comments
requesting that the 1996 proposed hedging regulations (INTL-0054-95,
1996-1 CB 844) be finalized and expanded, in certain cases, to cover
interbranch activities (including currency gains and losses). Since
those regulations were proposed, the increase in interdesk and
interbranch hedging (in both dealer and nondealer operations) has given
rise to special considerations other than the familiar limitations
associated with capital and ordinary income distinctions. In this
regard, the proposed 1998 global dealing regulations, for example,
require special considerations as to the appropriate treatment of risk
transfer agreements in similar circumstances. In light of the need for
a broader consideration of these issues, the Treasury Department and
the IRS are not adopting the suggestions outlined in the comments
received at this time. See Sec. 601.601(d)(2)(ii)(b).
Commentators also suggested that the regulations adopt special
rules that would govern the treatment of certain integrated financial
transactions such as effectively connected sale-repurchase agreements
and securities lending transactions. The commentators suggested the
adoption of a direct tracing rule that would, in effect, give zero risk
weighting to such assets, especially in defined dealer books consisting
of sale-repurchase transactions and securities loans involving U.S.
Treasuries and other government securities. The suggested rule would
scale back the amount of capital that is imputed to such portfolios
under either the actual ratio or the fixed ratio to reflect the
economic reality that such assets are entirely debt-financed.
Commentators also suggested that ``netting'' rules apply for offsetting
notional principal contracts within discrete portfolios. Finally,
commentators suggested revisions to the definition of U.S.-booked
liabilities that would exclude certain conduit interbranch lending
arrangements. The Treasury Department and the IRS are not adopting
these suggestions at this time but continue to consider the issues
raised in this context and intend to coordinate these issues, where
appropriate, with similar issues in analogous contexts, such as global
dealing operations and section 864(e). See Notice 2001-59 (2001-41 IRB
315, 2001-2 CB 315). See Sec. 601.601(d)(2)(ii)(b).
Section 861(a)(1)(C), as amended by the American Jobs Creation Act
of 2004 provides a special source rule for interest on obligations of
certain foreign partnerships and may require coordinating changes to
the branch-level interest tax rules under Sec. 1.884-4. Specifically,
a foreign corporate partner is not treated as paying branch interest
under Sec. 1.884-4(b)(1)(i)(A) and therefore may be liable for tax on
excess interest even if that foreign partner has U.S. book interest
paid with respect to its distributive share of U.S. booked liabilities
under Sec. 1.882-5. Accordingly, the Treasury Department and the IRS
are currently considering how best to coordinate the U.S. booked
liability rules with the determination of partnership branch interest
so that foreign corporate partners of partnerships described in section
861(a)(1)(C) are provided similar treatment under Sec. 1.884-4 with
respect to their distributive shares of interest expense as foreign
corporations directly
[[Page 49317]]
engaged in a trade or business within the United States.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations. It is hereby
certified that the collection of information contained in these
regulations will not have a significant economic impact on a
substantial number of small entities. Accordingly, a regulatory
flexibility analysis under the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. The collection of information requirement
in these regulations generally only affects large foreign banks. Thus,
the number of affected small entities will not be substantial and any
economic impacts on those entities in complying with the collection of
information would be minimal. Pursuant to section 7805(f) of the Code,
these regulations have been submitted to the Chief Counsel for Advocacy
of the Small Business Administration for comment on its impact on small
business.
Drafting Information
The principal author of these regulations is Anthony J. Marra of
the Office of Associate Chief Counsel (International). However, other
persons from the Office of Associate Chief Counsel (International) and
the Treasury Department have participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *.
0
Par. 2. Section 1.882-0 is amended by:
0
1. Revising the entries for Sec. 1.882-5(a)(1), (a)(1)(i), (a)(1)(ii),
(a)(1)(ii)(A), (a)(1)(ii)(B), (a)(2), (a)(7), (a)(7)(i), (a)(7)(ii),
(b)(2)(ii)(A), (b)(3), (c)(2)(iv), (c)(4), (d)(2)(iii)(A), and
(d)(5)(ii).
0
2. Adding entries for Sec. 1.882-5(a)(7)(iii), (b)(3)(i), (b)(3)(ii),
(d)(5)(ii)(A), and (d)(5)(ii)(B).
0
3. Removing the entries for Sec. 1.882-5T.
The revisions and additions read as follows:
Sec. 1.882-0 Table of contents.
* * * * *
Sec. 1.882-5 Determination of interest deduction.
(a)(1) Overview.
(i) In general.
(ii) Direct allocations.
(A) In general.
(B) Partnership interests.
(2) Coordination with tax treaties.
* * * * *
(7) Elections under Sec. 1.882-5.
(i) In general.
(ii) Failure to make the proper election.
(iii) Step 2 special election for banks.
* * * * *
(b) * * *
(2) * * *
(ii) * * *
(A) In general.
* * * * *
(3) Computation of total value of U.S. assets.
(i) General rule.
(ii) Adjustment to basis of financial instruments.
* * * * *
(c)(2)(iv) Determination of value of worldwide assets.
* * * * *
(4) Elective fixed ratio method of determining U.S. liabilities.
* * * * *
(d) * * *
(2) * * *
(iii) * * *
(A) In general.
* * * * *
(5) * * *
(ii) Interest rate on excess U.S.-connected liabilities.
(A) General rule.
(B) Annual published rate election.
* * * * *
0
Par. 3. Section 1.882-5 is amended by revising paragraphs (a)(1),
(a)(2), (a)(7), (a)(7)(i), (a)(7)(ii), (a)(7)(iii), (b)(2)(ii)(A),
(b)(3), (c)(2)(iv), (c)(4), (d)(2)(ii)(B)(2), (d)(2)(ii)(B)(3),
(d)(2)(iii)(A), (d)(5)(ii), (d)(6) Example 5 and (f)(1) to read as
follows:
Sec. 1.882-5 Determination of interest deduction.
(a)(1) Overview--(i) In general. The amount of interest expense of
a foreign corporation that is allocable under section 882(c) to income
which is (or is treated as) effectively connected with the conduct of a
trade or business within the United States (ECI) is the sum of the
interest allocable by the foreign corporation under the three-step
process set forth in paragraphs (b), (c), and (d) of this section and
the specially allocated interest expense determined under paragraph
(a)(1)(ii) of this section. The provisions of this section provide the
exclusive rules for allocating interest expense to the ECI of a foreign
corporation under section 882(c). Under the three-step process, the
total value of the U.S. assets of a foreign corporation is first
determined under paragraph (b) of this section (Step 1). Next, the
amount of U.S.-connected liabilities is determined under paragraph (c)
of this section (Step 2). Finally, the amount of interest paid or
accrued on U.S.-booked liabilities, as determined under paragraph
(d)(2) of this section, is adjusted for interest expense attributable
to the difference between U.S.-connected liabilities and U.S.-booked
liabilities (Step 3). Alternatively, a foreign corporation may elect to
determine its interest rate on U.S.-connected liabilities by reference
to its U.S. assets, using the separate currency pools method described
in paragraph (e) of this section.
(ii) Direct allocations--(A) In general. A foreign corporation that
has a U.S. asset and indebtedness that meet the requirements of Sec.
1.861-10T (b) or (c), as limited by Sec. 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 Sec.
1.861-10T. For purposes of paragraph (b)(1) or (c)(2) of this section,
a foreign corporation that allocates its interest expense under the
direct allocation rule of this paragraph (a)(1)(ii)(A) shall reduce the
basis of the asset that meets the requirements of Sec. 1.861-10T (b)
or (c) by the principal amount of the indebtedness that meets the
requirements of Sec. 1.861- 10T (b) or (c). The foreign corporation
shall also disregard any indebtedness that meets the requirements of
Sec. 1.861-10T (b) or (c) in determining the amount of the foreign
corporation's liabilities under paragraphs (c)(2) and (d)(2) of this
section and shall not take into account any interest expense paid or
accrued with respect to such a liability for purposes of paragraph (d)
or (e) of this section.
[[Page 49318]]
(B) Partnership interest. A foreign corporation that is a partner
in a partnership that has a U.S. asset and indebtedness that meet the
requirements of Sec. 1.861-10T (b) or (c), as limited by Sec. 1.861-
10T(d)(1), shall directly allocate its distributive share of interest
expense from that indebtedness to its distributive share of income from
that asset in the manner and to the extent provided in Sec. 1.861-10T.
A foreign corporation that allocates its distributive share of interest
expense under the direct allocation rule of this paragraph
(a)(1)(ii)(B) shall disregard any partnership indebtedness that meets
the requirements of Sec. 1.861-10T (b) or (c) in determining the
amount of its distributive share of partnership liabilities for
purposes of paragraphs (b)(1), (c)(2)(vi), and (d)(2)(vii) or
(e)(1)(ii) of this section, and shall not take into account any
partnership interest expense paid or accrued with respect to such a
liability for purposes of paragraph (d) or (e) of this section. For
purposes of paragraph (b)(1) of this section, a foreign corporation
that directly allocates its distributive share of interest expense
under this paragraph (a)(1)(ii)(B) shall--
(1) Reduce the partnership's basis in such asset by the amount of
such indebtedness in allocating its basis in the partnership under
Sec. 1.884-1(d)(3)(ii); or
(2) Reduce the partnership's income from such asset by the
partnership's interest expense from such indebtedness under Sec.
1.884-1(d)(3)(iii).
(2) Coordination with tax treaties. Except as expressly provided by
or pursuant to a U.S. income tax treaty or accompanying documents (such
as an exchange of notes), the provisions of this section provide the
exclusive rules for determining the interest expense attributable to
the business profits of a permanent establishment under a U.S. income
tax treaty.
* * * * *
(7) Elections under Sec. 1.882-5--(i) In general. A corporation
must make each election provided in this section on the corporation's
original timely filed Federal income tax return for the first taxable
year it is subject to the rules of this section. An amended return does
not qualify for this purpose, nor shall the provisions of Sec.
301.9100-1 of this chapter and any guidance promulgated thereunder
apply. Except as provided elsewhere in this section, each election
under this section, whether an election for the first taxable year or a
subsequent change of election, shall be made by indicating the method
used on Schedule I (Form 1120-F) attached to the corporation's timely
filed return. An elected method (other than the fair market value
method under paragraph (b)(2)(ii) of this section, or the annual 30-day
London Interbank Offered Rate (LIBOR) election in paragraph (d)(5)(ii)
of this section) must be used for a minimum period of five years before
the taxpayer may elect a different method. To change an election before
the end of the requisite five-year period, a taxpayer must obtain the
consent of the Commissioner or his delegate. The Commissioner or his
delegate will generally consent to a taxpayer's request to change its
election only in rare and unusual circumstances. After the five-year
minimum period, an elected method may be changed for any subsequent
year on the foreign corporation's original timely filed tax return for
the first year to which the changed election applies.
(ii) Failure to make the proper election. If a taxpayer, for any
reason, fails to make an election provided in this section in a timely
fashion, the Director of Field Operations may make any or all of the
elections provided in this section on behalf of the taxpayer, and such
elections shall be binding as if made by the taxpayer.
(iii) Step 2 special election for banks. For the first taxable year
for which an original income tax return is due (including extensions)
after August 17, 2006, in which a taxpayer that is a bank as described
in paragraph (c)(4) of this section is subject to the requirements of
this section, a taxpayer may make a new election to use the fixed ratio
on an original timely filed return. A new fixed ratio election may be
made in any subsequent year subject to the timely filing and five-year
minimum period requirements of paragraph (a)(7)(i) of this section. A
new fixed ratio election under this paragraph (a)(7)(iii) is subject to
the adjusted basis or fair market value conforming election
requirements of paragraph (b)(2)(ii)(A)(2) of this section and may not
be made if a taxpayer elects or maintains a fair market value election
for purposes of paragraph (b) of this section. Taxpayers that already
use the fixed ratio method under an existing election may continue to
use the new fixed ratio at the higher percentage without having to make
a new five-year election in the first year that the higher percentage
is effective.
* * * * *
(b) * * *
(2) * * *
(ii) * * *
(A) In general--(1) Fair market value conformity requirement. A
taxpayer may elect to value all of its U.S. assets on the basis of fair
market value, subject to the requirements of Sec. 1.861-9T(g)(1)(iii),
and provided the taxpayer is eligible and uses the actual ratio method
under paragraph (c)(2) of this section and the methodology prescribed
in Sec. 1.861-9T(h). Once elected, the fair market value must be used
by the taxpayer for both Step 1 and Step 2 described in paragraphs (b)
and (c) of this section, and must be used in all subsequent taxable
years unless the Commissioner or his delegate consents to a change.
(2) Conforming election requirement. Taxpayers that as of the
effective date of this paragraph (b)(2)(ii)(A)(2) have elected and
currently use both the fair market value method for purposes of
paragraph (b) of this section and a fixed ratio for purposes of
paragraph (c)(4) of this section must conform either the adjusted basis
or fair market value methods in Step 1 and Step 2 of the allocation
formula by making an adjusted basis election for paragraph (b) of this
section purposes while continuing the fixed ratio for Step 2, or by
making an actual ratio election under paragraph (c)(2) of this section
while remaining on the fair market value method under paragraph (b) of
this section. Taxpayers who elect to conform Step 1 and Step 2 of the
formula to the adjusted basis method must remain on both methods for
the minimum five-year period in accordance with the provisions of
paragraph (a)(7) of this section. Taxpayers that elect to conform Step
1 and Step 2 of the formula to the fair market value method must remain
on the actual ratio method until the consent of the Commissioner or his
delegate is obtained to switch to the adjusted basis method. If consent
to use the adjusted basis method in Step 1 is granted in a later year,
the taxpayer must remain on the actual ratio method for the minimum
five-year period unless consent to use the fixed ratio is independently
obtained under the requirements of paragraph (a)(7) of this section.
For the first taxable year for which an original income tax return is
due (including extensions) after August 17, 2006, taxpayers that are
required to make a conforming election under this paragraph
(b)(2)(ii)(A)(2), may do so on an original timely filed return. If a
conforming election is not made within the timeframe provided in this
paragraph, the Director of Field Operations or his delegate may make
the conforming elections in accordance with the provisions of paragraph
(a)(7)(ii) of this section.
* * * * *
(3) Computation of total value of U.S. assets--(i) General rule.
The total value
[[Page 49319]]
of U.S. assets for the taxable year is the average of the sums of the
values (determined under paragraph (b)(2) of this section) of U.S.
assets. For each U.S. asset, value shall be computed at the most
frequent regular intervals for which data are reasonably available. In
no event shall the value of any U.S. asset be computed less frequently
than monthly (beginning of taxable year and monthly thereafter) by a
large bank (as defined in section 585(c)(2)) or a dealer in securities
(within the meaning of section 475) and semi-annually (beginning,
middle and end of taxable year) by any other taxpayer.
(ii) Adjustment to basis of financial instruments. For purposes of
determining the total average value of U.S. assets in this paragraph
(b)(3), the value of a security or contract that is marked to market
pursuant to section 475 or section 1256 shall be determined as if each
determination date is the most frequent regular interval for which data
are reasonably available that reflects the taxpayer's consistent
business practices for reflecting mark-to-market valuations on its
books and records.
* * * * *
(c) * * *
(2) * * *
(iv) Determination of value of worldwide assets. The value of an
asset must be determined consistently from year to year and must be
substantially in accordance with U.S. tax principles. To be
substantially in accordance with U.S. tax principles, the principles
used to determine the value of an asset must not differ from U.S. tax
principles to a degree that will materially affect the value of the
taxpayer's worldwide assets or the taxpayer's actual ratio. The value
of an asset is the adjusted basis of that asset for determining the
gain or loss from the sale or other disposition of that asset, adjusted
in the same manner as the basis of U.S. assets are adjusted under
paragraphs (b)(2) (ii) through (iv) of this section. The rules of
paragraph (b)(3) of this section apply in determining the total value
of applicable worldwide assets for the taxable year, except that the
minimum number of determination dates are those stated in paragraph
(c)(2)(i) of this section.
* * * * *
(4) Elective fixed ratio method of determining U.S. liabilities. A
taxpayer that is a bank as defined in section 585(a)(2)(B) (without
regard to the second sentence thereof or whether any such activities
are effectively connected with a trade or business within the United
States) may elect to use a fixed ratio of 95 percent in lieu of the
actual ratio. A taxpayer that is neither a bank nor an insurance
company may elect to use a fixed ratio of 50 percent in lieu of the
actual ratio.
* * * * *
(d) * * *
(2) * * *
(ii) * * *
(B) * * *
(2) The foreign corporation enters the liability on a set of books
reasonably contemporaneously with the time at which the liability is
incurred and the liability relates to an activity that produces ECI.
(3) The foreign corporation maintains a set of books and records
relating to an activity that produces ECI and the Director of Field
Operations determines that there is a direct connection or relationship
between the liability and that activity. Whether there is a direct
connection between the liability and an activity that produces ECI
depends on the facts and circumstances of each case.
* * * * *
(iii) * * *
(A) In general. A liability, whether interest bearing or non-
interest bearing, is properly reflected on the books of the U.S. trade
or business of a foreign corporation that is a bank as described in
section 585(a)(2)(B) (without regard to the second sentence thereof)
if--
(1) The bank enters the liability on a set of books before the
close of the day on which the liability is incurred, and the liability
relates to an activity that produces ECI; and
(2) There is a direct connection or relationship between the
liability and that activity. Whether there is a direct connection
between the liability and an activity that produces ECI depends on the
facts and circumstances of each case. For example, a liability that is
used to fund an interbranch or other asset that produces non-ECI may
have a direct connection to an ECI producing activity and may
constitute a U.S.-booked liability if both the interbranch or non-ECI
activity is the same type of activity in which ECI assets are also
reflected on the set of books (for example, lending or money market
interbank placements), and such ECI activities are not de minimis. Such
U.S. booked liabilities may still be subject to paragraph (d)(2)(v) of
this section.
* * * * *
(5) * * *
(ii) Interest rate on excess U.S.-connected liabilities--(A)
General rule. The applicable interest rate on excess U.S.-connected
liabilities is determined by dividing the total interest expense paid
or accrued for the taxable year on U.S.-dollar liabilities that are not
U.S.-booked liabilities (as defined in paragraph (d)(2) of this
section) and that are shown on the books of the offices or branches of
the foreign corporation outside the United States by the average U.S.-
dollar denominated liabilities (whether interest-bearing or not) that
are not U.S.-booked liabilities and that are shown on the books of the
offices or branches of the foreign corporation outside the United
States for the taxable year.
(B) Annual published rate election. For each taxable year beginning
with the first year end for which the original tax return due date
(including extensions) is after August 17, 2006, in which a taxpayer is
a bank within the meaning of section 585(a)(2)(B) (without regard to
the second sentence thereof or whether any such activities are
effectively connected with a trade or business within the United
States), such taxpayer may elect to compute its excess interest by
reference to a published average 30-day London Interbank Offering Rate
(LIBOR) for the year. The election may be made for any eligible year by
indicating the rate used on Schedule I (Form 1120-F) attached to the
timely filed return. Once selected, the rate may not be changed by the
taxpayer. If a taxpayer that is eligible to make the 30-day LIBOR
election either does not file a timely return or files a calculation
that allocates interest expense under the scaling ratio in paragraph
(d)(4) of this section and it is determined by the Director of Field
Operations that the taxpayer's U.S.-connected liabilities exceed its
U.S.-booked liabilities, then the Director of Field Operations, and not
the taxpayer, may choose whether to determine the taxpayer's excess
interest rate under paragraph (d)(5)(ii)(A) or (B) of this section and
may select the published 30-day LIBOR rate.
(6) * * *
Example 5. U.S. booked liabilities--direct relationship. (i)
Facts. Bank A, a resident of Country X maintains a banking office in
the U.S. that records transactions on three sets of books for State
A, an International Banking Facility (IBF) for its bank regulatory
approved international transactions, and a shell branch licensed
operation in Country C. Bank A records substantial ECI assets from
its bank lending and placement activities and a mix of interbranch
and non-ECI producing assets from the same or similar activities on
the books of State A branch and on its IBF. Bank A's Country C
branch borrows substantially from third parties, as well as from its
home office, and lends all of its funding to its State A branch and
IBF to fund the mix of ECI, interbranch and non-ECI activities on
those two books. The consolidated books of State A branch and IBF
indicate that a substantial amount of the total book assets
constitute U.S. assets under
[[Page 49320]]
paragraph (b) of this section. Some of the third-party borrowings on
the books of the State A branch are used to lend directly to Bank
A's home office in Country X. These borrowings reflect the average
borrowing rate of the State A branch, IBF and Country C branches as
a whole. All third-party borrowings reflected on the books of State
A branch, the IBF and Country C branch were recorded on such books
before the close of business on the day the liabilities were
acquired by Bank A.
(ii) U.S. booked liabilities. The facts demonstrate that the
separate State A branch, IBF and Country C branch books taken
together, constitute a set of books within the meaning of paragraph
(d)(2)(iii)(A)(1) of this section. Such set of books as a whole has
a direct relationship to an ECI activity under paragraph
(d)(2)(iii)(A)(2) of this section even though the Country C branch
books standing alone would not. The third-party liabilities recorded
on the books of Country C constitute U.S. booked liabilities because
they were timely recorded and the overall set of books on which they
were reflected has a direct relationship to a bank lending and
interbank placement ECI producing activity. The third-party
liabilities that were recorded on the books of State A branch that
were used to lend funds to Bank A's home office also constitute U.S.
booked liabilities because the interbranch activity the funds were
used for is a lending activity of a type that also gives rise to a
substantial amount of ECI that is properly reflected on the same set
of books as the interbranch loans. Accordingly, the liabilities are
not traced to their specific interbranch use but to the overall
activity of bank lending and interbank placements which gives rise
to substantial ECI. The facts show that the liabilities were not
acquired to increase artificially the interest expense of Bank A's
U.S. booked liabilities as a whole under paragraph (d)(2)(v) of this
section. The third-party liabilities also constitute U.S. booked
liabilities for purposes of determining Bank A's branch interest
under Sec. 1.884-4(b)(1)(i)(A) regardless of whether Bank A uses
the Adjusted U.S. booked liability method, or the Separate Currency
Pool method to allocate its interest expense under paragraph 5(e) of
this section.
* * * * *
(f)(1) Effective/applicability date--(1) General rule. This section
is applicable for taxable years ending on or after August 15, 2009. A
taxpayer, however, may choose to apply Sec. 1.882-5T, rather than
applying the final regulations, for any taxable year beginning on or
after August 16, 2008 but before August 15, 2009.
* * * * *
Sec. 1.882-5T [Removed]
0
Par. 4. Section 1.882-5T is removed.
0
Par. 5. Section 1.884-1 is amended by revising paragraphs (e)(3)(ii),
(e)(3)(iv) and (e)(5) Example 2.
Sec. 1.884-1 Branch profits tax.
* * * * *
(e) * * *
(3) * * *
(ii) Limitation. For any taxable year, a foreign corporation may
elect to reduce the amount of its liabilities determined under
paragraph (e)(1) of this section by an amount that does not exceed the
lesser of the amount of U.S. liabilities as of the determination date,
or the amount of U.S. liability reduction needed to reduce a dividend
equivalent amount as of the determination date to zero.
* * * * *
(iv) Method of election. A foreign corporation that elects the
benefits of this paragraph (e)(3) for a taxable year shall attach a
statement to its return for the taxable year that it has elected to
reduce its liabilities for the taxable year under this paragraph (e)(3)
and that it has reduced the amount of its U.S.-connected liabilities as
provided in paragraph (e)(3)(iii) of this section and shall indicate
the amount of such reductions on such attachment. The cumulative amount
of all U.S. liability reductions is shown on Schedule I (Form 1120-F)
in addition to the separate elections attached to the timely filed
return. An election under this paragraph (e)(3) must be made before the
due date (including extensions) for the foreign corporation's income
tax return for the taxable year.
* * * * *
(5) * * *
Example 2. Election made to reduce liabilities. (i) As of the
close of 2007, foreign corporation A, a real estate company, owns
U.S. assets with an E&P basis of $1000. A has $800 of liabilities
under paragraph (e)(1) of this section. A has accumulated ECEP of
$500 and in 2008, A has $60 of ECEP that it intends to retain for
future expansion of its U.S. trade or business. A elects under
paragraph (e)(3) of this section to reduce its liabilities by $60
from $800 to $740. As a result of the election, assuming A's U.S.
assets and U.S. liabilities would otherwise have remained constant,
A's U.S. net equity as of the close of 1994 will increase by the
amount of the decrease in liabilities ($60) from $200 to $260 and
its ECEP will be reduced to zero. Under paragraph (e)(3)(iii) of
this section, A's interest expense for the taxable year is reduced
by the amount of interest attributable to $60 of liabilities and A's
excess interest is reduced by the same amount. A's taxable income
and ECEP are increased by the amount of the reduction in interest
expense attributable to the liabilities, and A may make an election
under paragraph (e)(3) of this section to further reduce its
liabilities, thus increasing its U.S. net equity and reducing the
amount of additional ECEP created for the election.
(ii) In 2009, assuming A again has $60 of ECEP, A may again make
the election under paragraph (e)(3) to reduce its liabilities.
However, assuming A's U.S. assets and liabilities under paragraph
(e)(1) of this section remain constant, A will need to make an
election to reduce its liabilities by $120 to reduce to zero its
ECEP in 2009 and to continue to retain for expansion (without the
payment of the branch profits tax) the $60 of ECEP earned in 2008.
Without an election to reduce liabilities, A's dividend equivalent
amount for 2009 would be $120 ($60 of ECEP plus the $60 reduction in
U.S. net equity from $260 to $200). If A makes the election to
reduce liabilities by $120 (from $800 to $680), A's U.S. net equity
will increase by $60 (from $260 at the end of the previous year to
$320), the amount necessary to reduce its ECEP to $0. However, the
reduction of liabilities will itself create additional ECEP subject
to section 884 because of the reduction in interest expense
attributable to the $120 of liabilities. A can make the election to
reduce liabilities by $120 without exceeding the limitation on the
election provided in paragraph (e)(3)(ii) of this section because
the $120 reduction does not exceed the amount needed to treat the
2009 and 2008 ECEP as reinvested in the net equity of the trade or
business within the United States.
(iii) If A terminates its U.S. trade or business in 2009 in
accordance with the rules in Sec. 1.884-2T(a), A would not be
subject to the branch profits tax on the $60 of ECEP earned in that
year. Under paragraph (e)(3)(v) of this section, however, it would
be subject to the branch profits tax on the portion of the $60 of
ECEP that it earned in 2008 that became accumulated ECEP because of
an election to reduce liabilities.
* * * * *
Sec. 1.884-1T [Removed]
0
Par. 6. Section 1.884-1T is removed.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
0
Par. 7. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
0
Par. 8. In Sec. 602.101, paragraph (b) is amended by removing the
entry for ``Sec. 1.882-5T'' from the table.
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
Approved: September 15, 2009.
Michael Mundaca,
(Acting) Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E9-22867 Filed 9-25-09; 8:45 am]
BILLING CODE 4830-01-P