1. Form 1120F and Schedules M-3, H, I & P
Institute of International Bankers
Annual Tax Conference – New York
June 18, 2007
Steven Quint (CALYON Bank): Moderator
Karina Pogrebinsky – KPMG
Lawrence Weinblatt – PWC
Debra Taylor – Ernst & Young
Stuart Zwerling – Deloitte Tax LLP
Paul Epstein – Office of Assoc. Chief Counsel (Int’l ) - IRS

2. Form 1120F, and Schedules M-3, H, I & P
Required for Foreign Corporation Tax Years 2007
E-File will be optional for 2007 year tax returns
Adopts new schedules
Schedule M-3 (Corporations with assets > $10 million)
Schedule H (Home Office and Trade or Business Expense Allocation - § )
Schedule I (Interest Expense Allocation - § )
Schedule P (Reconciliation of Foreign Partner K-1 to effectively connected income)
Coordinates § (d)(2) “set(s) of books and records” for 1120F Schedule L and for new schedules

3. Form 1120F: Schedule L Schedule L Books and Records:
§ (g)(1)(iii) permits ECI generating assets and U.S. based asset reporting
§ (d)(2) set(s) of books definition of “U.S. booked liabilities” is adopted consistent with the regulation (“Schedule L Books”)
Interbranch Assets
Non-U.S. Assets (non-ECI assets)
U.S. Assets (those includible under § (d))
Interbranch and 3rd Party Liability breakout
Schedule L Books uniformly used for Form M-3 books, and Schedules H, I & P
Schedule H – Part IV deductions on trade or business books allocated and apportioned to ECI/non-ECI
Schedule I - § reporting of U.S. booked liabilities and book expense
Schedule P – Liabilities on partnership trade or business books
Form 1120F, Page 5, Section II – Determination of branch interest for branch-level interest tax
Worldwide reporting permitted

4. Schedule M-3:Net Income (Loss) Reconciliation (1120F)
Financial Statement Identification:
Audited Statements
Unaudited Statements
Trial Balances
Non-Banks (Worldwide Statement)
Foreign Banks (Books used for Sched. L)
Part I (Financial Statement Net Income):
Nonconsolidated Statement (with parent)
May have subsidiaries consolidated
Include Disregarded Entities not on Statement
Exclude Subsidiaries/Entities in Consolidation
Eliminations for inter-company dividends
Line 11: Adjusted financial net income that constitutes the Foreign Corporation for tax purposes

5. Schedule M-3:Net Income (Loss) Reconciliation (1120F)
Part II: Reconciliation of Financial Gross Income in Part I, Line 11 to Taxable Income
Columns (a) – (c) adjust financial income to U.S. tax principles before apportionment to ECI
Columns (d) & (e) apportion gross income to ECI and non-ECI-
Non-Banks: Column (a) is Worldwide Gross Income – i.e. column (d) allocates only to non-ECI
Foreign Banks: Column (a) is Sched L books determined under § (d)(2) principles Column (d) may allocate column (a) amount to non-ECI
Line 23 special treatment allocates some offshore booked items to ECI
New Lines
Substitute Interest and Dividends Rec’d (Proprietary Securities Lending)
Expanded Mark-to-Market categories
Global Dealing Income

6. Schedule M-3:Net Income (Loss) Reconciliation (1120F)
Part II: Reconciliation of Financial Gross Income in Part I, Line 11 to Taxable Income
Line 23: Foreign Banks Only – Report ECI not on Schedule L books
Income/gains - §864(c)(6) and (c)(7)
Certain securities attributable to U.S. office under the material participation test in § (c)(5)(iii)
Line 28 col. (e) reconciles to 1120F, line 29
Part III: Reconciliation of Deductions to ECI
U.S. Source Substitute Interest and Dividends Paid
Special Reporting in columns (c) and (d) for non-ECI amounts not in column (a) or (e)
Interest equivalents (e.g. guarantee fees)
Home Office Allocation – From Sched. H

7. Schedule M-3:Net Income (Loss) Reconciliation (1120F)
Part III: Reconciliation of Deductions to ECI
Interest Expense Reconciliation to Schedule I
Amounts Reconcile to total deductions on Form 1120 F, Line 26

8. Schedule I: §1.882-5 Interest Expense Allocation
Identification of Step 3 Method
Step 1: US Assets
Schedule L Books
Aggregate adjustments (Column (a))
P’Ship Liabilities (Column (b))
Other non-Sched L US Assets – Column (c)
Step 2: US-Connected Liabilities
Identification of Ratio
USCL Amount
Liability Reduction Election
Step 3: U.S. Booked Liabilities/Int.
§ (d)(2) booked amount
Partnership booked liabilities
Schedule P Carryovers

9. Schedule I: §1.882-5 Interest Expense Allocation
Step 3: AUSBL Method
Bank 30-Day LIBOR Election Box
Actual Excess Interest Rate (if applicable)
Scaling Ratio (if applicable)
Hedging (not reported here)
Step 3: Separate Currency Pools Method
Handles Four Currencies on Form
3% Currency Election Box
Liability Reduction Election Amount
WW Avg. Borrowing Rate Ratio
Deduction by Currency
Summary of Results:
Allocation under 3-Step Formula
Directly Allocable Interest
Adjustments for Deferrals/Tax-Exempt
Deduction to 1120F, pg. 3, line 18

10. Schedule H: Deductions Allocated to ECI under §1.861-8
Part I: Direct Allocations
Identification of Costs
Adjustments to U.S. Principles
Direct Allocations to non-ECI
Residual Deductions
Part II : Indirect Allocations
Translation to US Dollars
Total H/O Allocation - Line 21
Part III: Financial Records & Methods
Gross Income Ratio
Gross Asset Ratio
Personnel Headcount Ratio
Ratios are not safe harbors

11. Schedule H: Deductions Allocated to ECI under §1.861-8
Part III (cont’d): Financial Records
Cost Acct’g Reports, etc.
Part IV: Trade or Business Books
Schedule L Books
Identification of Costs
Adjust to U.S. Tax Principles
Allocable Deduction Pool
Part IV: Schedule L Deductions Allocable to ECI/non-ECI
Direct allocations for NPC Exp.
Direct cost allocations
Indirect cost allocations
Reconciles to Form 1120F, pg. 3

12. Schedule P: Reconciliation of Foreign Partner Income
Part I: List of Foreign Partner Interests
Report only top tier P’ship Interests
Attach schedule if over 5 Interests
Part II: Reconciliation of Form K-1 to ECI, Deductions and Book Interest Expense:
Trade or Business Line Gross-ups
Gross Income
Non-Interest Expense Deductions
Other Gross Income
Other non-Interest Expense
Interest Expense Groupings
Trade or Business Lines
Other Interest Lines
Directly Allocable Amounts
Amounts Flow to Schedule I

13. Schedule P: Reconciliation of Foreign Partner Income
Part III: Partner Outside Basis for Interest
Expense Allocation under § :
Partner Basis under §705
Identification of direct allocations
Other Partner Liabilities
Flows to Schedule I, Line 8, col. (b)
Adjusted Outside Foreign Partner Basis
Apportionment of Adj. Outside Basis
Flows to Schedule I, Line 5, col. (b)
Identify “Income” or “Asset” Method