Federal Register / Vol. 74, No. 186 / Monday, September 28, 2009 / Rules and Regulations 49315 

of conveyance—trucks, railroad cars, 

maritime vessels, and aircraft—are 

assessed AQI user fees upon arrival in 

the United States. According to the 

guidelines established by the Small 

Business Administration, most of the 

surface, waterborne, and air conveyance 

entities that are directly affected by the 

rule are small, although we do not have 

precise estimates of their numbers. 

However, the user fee changes represent 

a small portion of overall operating 

costs for affected transportation entities 

whether small or large, and should 

therefore have a small impact on those 

entities. We invite public comment on 

this interim rule, including any 

comment on the rule’s expected impact 

on small entities. 

Alternatives to this rulemaking that 

were considered included taking no 

action or enacting even higher fee 

increases to build the reserve quickly. 

For reasons discussed in the full 

analysis, these alternatives were not 

pursued. 

Executive Order 12988 

This rule has been reviewed under 

Executive Order 12988, Civil Justice 

Reform. This rule: (1) Has no retroactive 

effect; and (2) does not require 

administrative proceedings before 

parties may file suit in court challenging 

this rule. 

Paperwork Reduction Act 

This rule contains no new 

information collection or recordkeeping 

requirements under the Paperwork 

Reduction Act of 1995 (44 U.S.C. 3501 

et seq.). 

List of Subjects in 7 CFR Part 354 

Animal diseases, Exports, 

Government employees, Imports, Plant 

diseases and pests, Quarantine, 

Reporting and recordkeeping 

requirements, Travel and transportation 

expenses. 

■ Accordingly, we are amending 7 CFR 

part 354 as follows: 

PART 354—OVERTIME SERVICES 

RELATING TO IMPORTS AND 

EXPORTS; AND USER FEES 

■ 1. The authority citation for part 354 

continues to read as follows: 

Authority: 7 U.S.C. 7701–7772, 7781– 

7786, and 8301–8317; 21 U.S.C. 136 and 

136a; 49 U.S.C. 80503; 7 CFR 2.22, 2.80, and 

371.3. 

■ 2. Section 354.3 is amended by 

revising the tables in paragraphs (b)(1), 

(c)(1), (d)(1), (e)(1), and (f)(1) to read as 

set forth below. 

§ 354.3 User fees for certain international 

services. 

* * * * * 

(b) Fee for inspection of commercial 

vessels of 100 net tons or more. (1) 

* * * 

Effective dates Amount 

October 1, 2008, through September 30, 2009 ........................ $494.00 

Beginning October 1, 2009 .......... 544.00 

* * * * * 

(c) Fee for inspection of commercial 

trucks. (1) * * * 

Effective dates Amount 

October 1, 2008, through September 30, 2009 ........................ $5.25 

Beginning October 1, 2009 .......... 6.00 

* * * * * 

(d) Fee for inspection of commercial 

railroad cars. (1) * * * 

Effective dates Amount 

October 1, 2008, through September 30, 2009 ........................ $7.75 

Beginning October 1, 2009 .......... 8.75 

* * * * * 

(e) Fee for inspection of commercial 

aircraft. (1) * * * 

Effective dates Amount 

October 1, 2008, through September 30, 2009 ........................ $70.75 

Beginning October 1, 2009 .......... 78.00 

* * * * * 

(f) Fee for inspection of international 

passengers. (1) * * * 

Effective dates 1 Amount 

October 1, 2008, through September 30, 2009 ........................ $5.00 

Beginning October 1, 2009 .......... 5.50 

1Persons who issue international airline 

tickets or travel documents are responsible for 

collecting the AQI international airline passenger user fee from ticket purchasers. 

Issuers must collect the fee applicable at the 

time tickets are sold. In the event that ticket 

sellers do not collect the AQI user fee when 

tickets are sold, the air carrier must collect the 

user fee from the passenger upon departure. 

Carriers must collect the fee applicable at the 

time of departure from the traveler. 

* * * * * 

Done in Washington, DC, this 23rd day of 

September 2009. 

John Ferrell, 

Deputy Under Secretary for Marketing and 

Regulatory Programs. 

[FR Doc. E9–23387 Filed 9–25–09; 8:45 am] 

BILLING CODE 3410–34–P 

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. 

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 § 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. 


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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 

§ 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 § 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 

§ 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 § 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 § 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 

§ 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 

§ 1.882–4(a)(3)(vi) may make § 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 § 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 

§ 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 

§ 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 debtfinanced. 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 

§ 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 § 1.884–4. 

Specifically, a foreign corporate partner 

is not treated as paying branch interest 

under § 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 § 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 § 1.884–4 with respect 

to their distributive shares of interest 

expense as foreign corporations directly 


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Federal Register / Vol. 74, No. 186 / Monday, September 28, 2009 / Rules and Regulations 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 

■ Accordingly, 26 CFR parts 1 and 602 

are amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

Authority: 26 U.S.C. 7805 * * *. 

■ Par. 2. Section 1.882–0 is amended 

by: 

■ 1. Revising the entries for § 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). 

■ 2. Adding entries for § 1.882– 

5(a)(7)(iii), (b)(3)(i), (b)(3)(ii), 

(d)(5)(ii)(A), and (d)(5)(ii)(B). 

■ 3. Removing the entries for § 1.882– 

5T. 

The revisions and additions read as 

follows: 

§ 1.882–0 Table of contents. 

* * * * * 

§ 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 § 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. 

* * * * * 

■ 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: 

§ 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 § 1.861–10T (b) or (c), 

as limited by § 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 § 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 

§ 1.861–10T (b) or (c) by the principal 

amount of the indebtedness that meets 

the requirements of § 1.861- 10T (b) or 

(c). The foreign corporation shall also 

disregard any indebtedness that meets 

the requirements of § 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. 


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49318 Federal Register / Vol. 74, No. 186 / Monday, September 28, 2009 / Rules and Regulations 

(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 § 1.861–10T (b) or (c), as limited by 

§ 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 § 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 § 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 § 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 § 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 § 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 § 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 fiveyear 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 § 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 § 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 


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Federal Register / Vol. 74, No. 186 / Monday, September 28, 2009 / Rules and Regulations 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 


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49320 Federal Register / Vol. 74, No. 186 / Monday, September 28, 2009 / Rules and Regulations 

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 § 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 § 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. 

* * * * * 

§ 1.882–5T [Removed] 

■ Par. 4. Section 1.882–5T is removed. 

■ Par. 5. Section 1.884–1 is amended by 

revising paragraphs (e)(3)(ii), (e)(3)(iv) 

and (e)(5) Example 2. 

§ 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 § 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. 

* * * * * 

§ 1.884–1T [Removed] 

■ Par. 6. Section 1.884–1T is removed. 

PART 602—OMB CONTROL NUMBERS 

UNDER THE PAPERWORK 

REDUCTION ACT 

■ Par. 7. The authority citation for part 

602 continues to read as follows: 

Authority: 26 U.S.C. 7805. 

■ Par. 8. In § 602.101, paragraph (b) is 

amended by removing the entry for 

‘‘§ 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 


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