rom 91359 Computation of Possessions Corporation

OMB No. 1545-0217

(Rev. September 1989) Tax Credit Allowed Under Section 936

Department of the Treasury Expires 8:31.92
Internal Revenue Service > Attach to your tax return

For calendar year 19 _, or other tax year beginning 119 and ending 119
Name Employer identification number

| Part || Gross Income in Applicable Period

Tax year (Use a separate line for each tax year Name of U.S. possession in which trade or Periods in which trade or business was actively
ending with or within your applicable period. Start business was actively conducted conducted in a U.S. possession (Dates are
with the earliest such tax year. See instruction B.) inclusive)
Beginning Ending From— To—
@) (b) ©) @) (e)

Gross income during periods shown in columns (d) and (e)

Gross income from the active conduct of a trade or business ina U.S. possession| Gross qualified Alllother gross income
From sources in U.S. | Fromallother sources | __ From sources in possession source “From sources in U.S. | Fromall other sources | From sources in the
possessions outside the U.S. the U.S. Investment income possessions outside the U.S. US.
10} (g) (h) @ On (k) 0)
2
é
1 Total gross income in applicable period (add totals of columns (f) through (1) . woe 1
2 Gross income in applicable period from sources in U.S. possessions (add total of columns (f), (i), and @) 2
3. Divide line 2 by line 1 (if less than 80%, do not complete Parts II and III) . 3
4 Gross income from the active conduct of a trade or business in a U.S. possession (total of columns , ©, and (h)) 4
5. Divide line 4 by line 1 (if less than 75%, (see General Instruction B for exception), do not complete Parts Il and III) 5
Computing the Possessions Corporation Tax Credit
6 Qualified gross income in current year: 1/7
arom sources outside the U.S. from the active conduct of a trade or
business in a U.S. possession (see instructions) . . . | 6a Y
b From sources outside the U.S. from the sale or exchange of substantially all
assets used ina possessions trade orbusiness. . . . ... . . . . | 6b
c Gross qualified possession source investment income . So. | Be
d Amounts received in the U.S. (see instructions) . . . . 2... 6d
e Intangible property income subject to section 936(h)(2). . . . . - . | be
f Other intangible property income (see instructions) . . . . . . - . | 6
g Add lines 6a,6b,and6éc. . . . . . . . . | 68 1]/7/
hAddlines6d,6e,and6f&.. . . . . .. . . 6h

i Subtract line 6h from line 6g

7 Applicable deductions (attach schedule cs i
a Cost sharing amount (see instructions) . . . . . ....... . {7a
b Definitely allocable deductions (see instructions). . . . . . . . . . L7B
MM

c Ratable part of deductions not definitely allocable. . . . . . 2... 7c
d Total (add lines 7a, 7b, and 7c). . . a WL
8 Qualified taxable income before adjustments (Gubtract line 7d from line 6i). if there are no , adjustments,
enter the amount from this line online 10 . sone
9 Adjustments (attach schedule):

a Current year losses from nonqualified sources. 2 2. 1 ee ee ee 9a —
b Recapture of prior year overall foreignlosses . . . ....... . {9b 7

c¢ Income against which foreign tax creditisclamed. . . . . . . ss = 9c LL
d Total (addlines9a,9b,and9c). . . . . ee 2

10 Qualified taxable income (subtract line 9d from line 8). tone re  O

11 Total taxable income from all sources (enter taxable income from your tax return) rr i © 4

12 Divideline1Obylinell. . . . . eee of 82

13 Total U.S. income tax against which section 936 credit i is s allowed (see General Instruction | ©Q .... 43

14 Section 936 credit (multiply line 12 by line 13). Enter here and on yourtaxreturn . . . 14

For Paperwork Reduction Act Notice, see instructions on back. Form 5735. (Rev. 9-89)


Form 5735 (Rev. 9-89)

Page 2

Summary From Schedule P (Form 5735) (see instructions)

15 Enter the total sales of possession products to which each income method applies: YY YY}
a Cost sharing method 15a
b Profit split method . . toa 15b
16 Enter the total sales of possession products which qualify under each ‘business | presence test: Uh
a Direct labor test 16a
b Value-added test . 16b
c Alternative test 16c
d Start-up test 16d
e None of the above 16e

Instructions

(Section references are to the Internal Revenue
Code unless otherwise noted.)

Paperwork Reduction Act Notice. —We ask for
this information to carry out the Internal Revenue
laws of the United States. We need it to ensure
that taxpayers are complying with these laws and
to allow us to figure and collect the right amount

of tax. You are required to give us this information.

The time needed to complete and file this form
will vary depending on individual circumstances.
The estimated average time is:

Recordkeeping . » 11 hrs., 43 min
Learning about the

lawor the form . 2hrs., 11 min.
Preparing and sending

the form toIRS . 2hrs., 14 min.

If you have comments concerning the accuracy
of these time estimates or suggestions for making
the form more simple, we would be happy to hear
from you. You can write to either IRS or the
Office of Management and Budget at the
addresses listed in the instructions for the tax
return with which this form is filed.

Other Forms That May Be Required. —Use
Form 5712-A, Election and Verification of the
Cost Sharing or Profit Split Method Under Section
936(h)(5), to elect the cost sharing or profit split
method of computing taxable income for these
types of income. Form 5712-A is also used to
show how possessions corporations satisfied the
“significant business presence test.” This test
must be met before the possessions corporation
can use either the cost sharing or profit split
method. See section 936(h)(5) and the related
regulations for rules concerning the treatment of
intangible and other income

General Instructions

A. Purpose of Form.—A domestic corporation
that has elected to be treated as a possessions
corporation must attach Form 5735 to its income
tax return for each year that the election is in
effect. Complete Form 5735 to figure the
possessions corporation tax credit under section
936. The credit is allowed against income tax
imposed by Chapter 1. Puerto Rico and the Virgin
Islands are U.S. possessions for purposes of this
credit.

B. Qualifying for the Credit.—To qualify for the
possessions tax credit, a corporation must:

(1) have filed a valid Form 5712, Election To
Be Treated as a Possessions Corporation Under
Section 936;

(2) have derived 80% or more of its gross
income from sources in a U.S. possession during
the applicable period immediately before the tax
year ended; and

(3) have derived 75% or more of its gross
income from the active conduct of a trade or
business in a U.S. possession during the
applicable period immediately before the tax year
ended. Exception. For tax years that begin before
1987, there is an exception to the rule that 75%
of gross income be derived from the active
conduct of a trade or business ina U.S.

possession. See section 1012(n)(3)of the
Technical and Miscellaneous Revenue Act of
1988 for more information.

The “applicable period” is generally the shorter
of 36 months or the period when the corporation
actively conducted a trade or business ina U.S.
possession
C. Restrictions.—A corporation 1s ineligible to
take the possessions tax credit for any tax year it
is a DISC or former DISC, or for any tax year in
which it owns stock in a DISC or FSC, or former
DISC or former FSC (section 936(f)).

The credit is not allowed against the following
taxes:
© environmental tax (section 59)
© tax on accumulated earnings (section 531)
© personal holding company tax (section 541)
© additional tax for recovery of foreign

expropriation losses (section 1351)

@ tax increase on the early disposition of

investment credit property (section 47)
© tax on certain capital gains of S corporations

(section 1374)
© recapture of low-income housing credit

(section 42()(4\(D))

D. Where To File.—Attach Form 5735 to your
income tax return and file your return with the
Internal Revenue Service Center, Philadelphia,
PA 19255.

E. Alternative Minimum Tax.—Income eligible
for the possessions corporation tax credit is not
taxed under the alternative minimum tax rules.
See Form 4626.

Specific Instructions

Follow sections 638, 861-864, and 936 to
determine if the source of gross income,
deductions, and taxable income is in or outside
the U.S. or ina U.S. possession. Amounts
received in the U.S. may be considered sourced
outside the U.S. if the amounts are from sources
outside the U. S. and received from an unrelated
person in the active conduct of a trade or
business (section 936(b)).

You cannot take a deduction or foreign tax
credit for taxes you paid or accrued to a foreign
country or U.S. possession if any of the income on
which those taxes were paid or accrued is used in
computing the possessions corporation tax credit.

Part!

Column (f).—Enter the gross income from the
active conduct of a trade or business ina U.S.
Possession which is from sources in U.S.
possessions. Include amount(s) reported on line

6 of Part Il of Schedule(s) P.

Column (i).—Enter gross qualified possession
source investment income in column (i). Subject
to conditions set forth in regulations, certain
investments ina financial institution shall be
considered investments for use in Puerto Rico.
These investments must be made in financial
institutions for investments consistent with the
goals of the Caribbean Basin Economic Recovery
Act, and must either be invested in active business
assets in a qualified Caribbean Basin country or
invested in development projects in a qualified
Caribbean Basin country, and the investment

must be specifically authorized by the
Commissioner of Financial Institutions of Puerto
Rico.

Part Il

Line 6a.—Include amount(s) reported on line 6
of Part Il of Schedule(s) P.

Line 6b.—include gross income that came from
sources outside the U.S. from selling or
exchanging substantially all the assets the
possessions corporation used in the active
conduct of its trade or business.

Line 6d.—Do not include any amount on line 6d
that is from sources outside the U.S. and is
received from a person who is not a related person
in the active conduct of a trade or business ina
U.S. possession. Instead, include these amounts
on line 6a, 6b, or 6c, whichever is applicable.

Line 6f.—Enter the amount of marketing
intangible property income which is associated
with any product(s) subject to the cost sharing
method and which is not included in the gross,
income of a shareholder because such a
shareholder is a foreign person or a tax-exempt
U.S. person. See Regulations section 1.936-
6(a)(5).

Line 7a.—Include the sum of all cost sharing
amounts entered on line 7 of Part | of

Schedule(s) P if the cost sharing method applies.
Line 7b.—Include all amounts entered on line 7 of
Part Il of Schedule(s) P. Also include the
corporation's other definitely allocable deductions.

Line 7c. —Enter on line 7c the ratable part of
deductions that cannot be definitely allocated to
qualified income. To obtain this figure, reduce
the deductions by the amount entered on line 7b.
Multiply this result by the amount obtained when
you divide the amount entered on line 6i by the
gross Income on your income tax return.

Line 9a.—If you sustain a loss for the current
year on any type of income for which a separate
foreign tax credit limit applies, allocate the loss to
the possessions income that qualifies for the
credit in proportion to the ratio of that income to
total taxable income, excluding the loss.

Line 9b.—if you sustain an overall foreign loss in
any year, the loss is recaptured in later tax years
by treating part of your taxable income from
sources outside the U.S. as income from sources
in the U.S, (section 904(f)).

Part Ill

You are not required to complete Part Ill if you
have attached fewer than 10 Schedules P. Part II
information will not affect your tax liability.
Failure to complete this part, if required, will
delay the processing of your Form 5735.

Line 15.—Enter on line 15a the sum of sales of
possession products (as reported on line 2 of Part!
of Schedule(s) P) subject to the cost sharing
method. Enter on line 15b the sum of sales of
possession products (as reported on line 2 of Part |
of Schedule(s) P) subject to the profit split method.
Line 16.—Enter on lines 16a through 16e the
sum of sales of possession products (as reported
on line 2 of Part | of Schedule(s) P) which have
met the listed business presence test. Total sales
included on lines 16a through 16e should equal
the total of lines 15a and 15b.