Election and Verification of the Cost Sharing or

Profit Split Method Under Section 936(h)(5)

Form 5712-A

OMB No. 1545-0215 (Rev. September 2000)

Department of the Treasury

Internal Revenue Service  Attach to Schedule P (Form 5735)

The corporation named below elects under section 936(h)(5) to use the cost sharing or profit split method for income tax purposes.

Name of corporation Employer identification number

Enter the possession product to which this form relates: SIC code 

Significant Business Presence Tests

Tests Used To Qualify for Cost Sharing or Profit Split Method

Complete the column and lines that apply for the method you elected and the test you meet.

Direct Labor Test Cost Sharing Profit Split

1 Possessions corporation’s direct labor costs

2 Total direct labor costs of affiliated group

3 Divide line 1 by line 2

If line 3 is at least 65% (see the instructions for start-up operations for exceptions), you meet the

direct labor test and you qualify to use the cost sharing method. To see if you qualify for the profit

split method, answer the question on line 18. If line 3 is less than 65%, you do not meet the direct

labor test. Complete lines 4 through 8 to see if you qualify under the value added test.

Value Added Test

4 Production costs of possessions corporation

Gross receipts on sales or dispositions of possession product by the affiliated group

to unrelated parties

5

Cost of direct material purchased from unrelated suppliers used in the production

of the possession product

6

7 Subtract line 6 from line 5

8 Divide line 4 by line 7

If line 8 is at least 25% (see the instructions for start-up operations for exceptions), you meet the

value added test and you qualify to use the cost sharing method. To see if you qualify for the

profit split method, answer the question on line 18. If line 8 is less than 25%, you do not meet the

value added test. Complete lines 9 through 15 to see if you qualify under the alternative test.

Alternative Test Used To Qualify for Cost Sharing or Profit Split Method

9 Direct labor costs of possessions corporation

10 Direct labor costs of affiliated group

11 Divide line 9 by line 10

If line 11 is at least 50%, go to line 12. If line 11 is less than 50%, you do not meet the alternative test.

12 Base period construction costs

13 Add lines 9 and 12

14 Add lines 10 and 12

15 Divide line 13 by line 14

If line 15 is at least 70%, you meet the alternative test and you qualify to use the

cost sharing method. To see if you qualify for the profit split method, answer the

question on line 18. If line 15 is less than 70%, you do not meet the alternative test.

Start-up Operations (see instructions)

16 If the corporation is engaged in start-up operations, check this box 

Enter the beginning date of the tax year the possessions corporation began producing the product in

the possession 

17

If you are claiming the profit split method: Is the possession product manufactured (as defined in Regulations

section 1.954-3(a)(4)) in the possession?

18

Yes No

If “No,” you do not qualify to use the profit split method of computing taxable income.

Other Information

Under penalties of perjury, I declare that I have been duly authorized by the above-named corporation to make this election, and that to the best of my knowledge and

belief, the statements made are true, correct, and complete; and that I have received signed statements in which an authorized officer of each corporation in the attached

list of affiliated group members for Part IV consents to the above election.

Signature and title of officer of electing corporation Date

For Paperwork Reduction Act Notice, see instructions on back. Cat. No. 61166D Form 5712-A (Rev. 9-2000)

Part III

Part IV

Part I

Part II

Note: Corporations engaged in start-up operations in a possession may be able to reduce the percentages computed on lines 3 and 8

below. See the instructions for start-up operations.

Note: Affiliated group members must attach a list showing name, address, and employer identification number of all members of the group.
Form 5712-A (Rev. 9-2000) Page 2

Instructions

Section references are to the Internal Revenue Code unless

otherwise noted.

Manufacturing in a Possession

The rules under Regulations section 1.954-3(a)(4) apply in

determining if the possession product has been manufactured in a

possession. Manufacturing has taken place if:

Paperwork Reduction Act Notice. We ask for the information on

this form to carry out the Internal Revenue laws of the United States.

You are required to give us the information. We need it to ensure

that you are complying with these laws and to allow us to figure and

collect the right amount of tax.

1. The product has been substantially transformed by the

possessions corporation in the possession;

2. Operations performed by the possessions corporation in the

possession for the property are substantial and are generally

considered to constitute the manufacture or production of

property; or

The time needed to complete and file this form will vary depending

on individual circumstances. The estimated average time is:

Recordkeeping 5 hr., 44 min.

3. Conversion costs incurred by the possessions corporation in the

possession, including direct labor, factory burden, testing of

components before incorporation into an end product, and testing of

the manufactured product before sales, are at least 20% of the total

cost of goods sold of the possessions corporation. Packaging,

repackaging, labeling, or minor assembly operations do not qualify

as manufacturing.

Learning about the law or the form 1 hr., 0 min.

Preparing and sending the form to the IRS 1 hr., 8 min.

If you have any comments concerning the accuracy of these time

estimates or suggestions for making this form simpler, we would be

happy to hear from you. See the instructions for the tax return with

which this form is filed.

Purpose of Form

Definitions

Direct labor

Production costs

Possession Product

“Possesssion product” means an item of property which is the result

of a manufacturing process. The term “product” includes component

products, integrated products, and end-product forms. An affiliated

group may establish reasonable groupings of possession products

as a single product. New groupings may be established each year.

The Commissioner may disallow any grouping that materially distorts

income or the significant business presence test. See Regulations

section 1.936-5(a) for more details.

Base period construction costs

Significant Business Presence Tests

SIC Code

An election to use the cost sharing or profit split method applies to

all products in a product area. In the space at the top of the form for

“SIC code,” enter the three-digit code for the product or product

area for which this Form 5712-A is being filed. See the Standard

Industrial Classification Manual for the proper code for the product

or product area.

Signature

Form 5712-A must be signed by the president, vice president,

treasurer, assistant treasurer, chief accounting officer, or other

corporate officer (such as tax officer) authorized to sign.

These costs are the average construction costs incurred by or on

behalf of the possessions corporation for services in the possession

during the current and preceding 4 tax years for section 1250

property. This property must be used to manufacture the product or

to render the services in the possession, and must represent the

original use of the section 1250 property. If the possessions

corporation did not exist during any year or years in the base period,

the total amount of base period construction costs for such year or

years is zero.

These include direct labor costs and fixed and variable indirect

production costs. Only those costs that are inventoriable under

section 471 are qualified production costs.

This is labor associated with units of production. Basic

compensation, overtime, holiday and vacation pay, shift differential,

payroll taxes, contributions to unemployment benefit plans, and

certain types of payments for sick leave are all part of direct labor if

they can be associated with production. Direct labor costs are only

those costs that are inventoriable under section 471.

Possession corporations complete Form 5712-A:

Note: All members of an affiliated group must consent to the

election. See Regulations section 1.936-7(a) for details.

The possessions corporation must show that it had a significant

business presence in the possession for the tax year by meeting one

of the tests in Parts I and II. Corporations that use the profit split

method must also certify that the possession product was

manufactured in the possession.

If the corporation is using the cost sharing method, it must meet

one of the following tests:

● Direct labor test (Part I)

If the corporation is using the profit split method, it must

● Answer “Yes” to the question on line 18 in Part IV.

How to File

Attach Form 5712-A to Schedule P (Form 5735), Allocation of

Income and Expenses Under Section 936 (h)(5), and file with

Form 5735, Possessions Corporation Tax Credit (Under Sections

936 and 30A).

Start-up Operations

Products that were not previously produced (or services that were

not previously rendered) in the possession are eligible for a 3-year

phase-in of the 65% direct labor test (line 3) and the 25% value

added test (line 8), beginning with the year the corporation first starts

to sell the product (or provide the service). For more information, see

Regulations section 1.936-5(b)(7). The percentages that apply during

the phase-in are:

65% Direct labor test 35%

25% Value added test 10%

Line 3. Enter the applicable percentage from the chart above

(instead of 65%).

Year

45% 55%

15% 20%

123

● Value added test (Part I)

● Alternative test (Part II)

● To show in subsequent tax years that the corporation continues to

have a “significant business presence” (see below) in the possession

with regard to the product or product area for that tax year.

You are not required to provide the information requested on a

form that is subject to the Paperwork Reduction Act unless the form

displays a valid OMB control number. Books or records relating to a

form or its instructions must be retained as long as their contents

may become material in the administration of any Internal Revenue

law. Generally, tax returns and return information are confidential, as

required by section 6103.

Once an election is made, it generally applies for that year and all

subsequent tax years, and may be revoked only with the consent of

the Commissioner.

● Meet one of the tests specified above and:

Line 8. Enter the applicable percentage from the chart above

(instead of 25%).

● To elect the cost sharing method or the profit split method of

computing taxable income for all possession products in a product

area (see SIC Code, below) and