Foreign Tax Credit - Corporations

Schedule E

Use Schedule E to report foreign taxes deemed paid with respect to dividends from certain fourth-, fifth-, and sixth-tier controlled foreign corporations out of earnings accumulated in tax years beginning after August 5, 1997. Follow the instructions for the corresponding columns of Schedule D, Part I, Section A, substituting references to the next lower-tier foreign corporation as appropriate.

The post-1986 undistributed earnings and taxes pools for the eligible CFCs begin on the first day of the CFC's first taxable year beginning after August 5, 1997. Earnings accumulated in taxable years beginning before August 6, 1997 will be treated as pre-1987 accumulated profits for section 902 purposes. See section 902(c)(6) and Regulations section 1.902-1(a)(10)(i). Foreign income taxes attributable to these pre-pooling profits must be reduced when the associated earnings are distributed. However, such taxes are not eligible for the deemed paid credit. See Regulations section 1.902-1(a)(10)(iii) and section 1113(c)(2) of the Taxpayer Relief Act of 1997.

Note: In completing Part III, column 5, note that, under section 902(b) as amended by the Taxpayer Relief Act of 1997, no taxes are deemed paid by a sixth- or lower-tier foreign corporation with respect to dividends received from lower-tier foreign corporations.

Schedule F

Enter the gross income and definitely allocable deductions for each foreign branch (including a disregarded entity) as indicated. For each such foreign branch, attach an income statement, balance sheet, and schedule of remittances.

Schedule G

Line A. If the corporation claims a deduction for percentage depletion under section 613 with respect to any part of its foreign mineral income (as defined in section 901(e)(2)) for the tax year, any foreign taxes on that income must be reduced by the smaller of:

1. The foreign taxes minus the tax on that income or
2. The tax on that income determined without regard to the deduction for percentage depletion minus the tax on that income.

The reduction must be made on a country-by-country basis (Regulations section 1.901-3(a)(1)). Attach a separate schedule showing the reduction.

Line C. If the corporation chooses to calculate the reduction in the foreign tax by identifying taxes specifically attributable to participation in or cooperation with an international boycott, enter the amount from Form 5713, Schedule C, line 2b. See Form 5713 and its separate Schedule C and instructions.

Line D. If the corporation controls a foreign corporation or partnership and fails to furnish any return or any information in any return required under section 6038(a) by the due date, reduce the foreign taxes available for credit under sections 901, 902, and 960 by 10%. If the failure continues for 90 days or more after the date of written notice by the IRS, reduce the tax by an additional 5% for each 3-month period or fraction thereof during which the failure continues after the 90-day period has expired. See section 6038(c) for limitations and special rules.

In addition, a $10,000 penalty is imposed under section 6038(b) for failure to supply the information required under section 6038(a) for each entity within the time prescribed. If the required information is not submitted within 90 days after the IRS has mailed notice to the U.S. person, additional penalties apply.

Note: The reduction in foreign taxes available for credit is reduced by any dollar penalty imposed under section 6038(b).

Line E. Include the following:

1. The reduction described in section 904(d)(2)(E)(ii) for taxes deemed paid with respect to dividends from a noncontrolled section 902 corporation out of E&P attributable to interest subject to withholding in excess of a 5% rate and
2. The reduction for foreign taxes on foreign oil related income under section 907(b).

Schedule H

Computer-Generated Schedule H

A computer-generated Schedule H may be filed if it conforms to the IRS version. In some cases, Schedule H can be expanded to properly apportion deductions. This applies in cases such as when the corporation:

• Has more than two product lines (under the sales method of apportioning R&D deductions),
• Owns an interest in more than one noncontrolled section 902 corporation,
• Has section 901(j) income from more than one sanctioned country, or
• Has income re-sourced by treaty for more than one country.

Part I - Research and Development Deductions

Use Part I to apportion the research and development (R&D) deductions that cannot be definitely allocated to some item or class of gross income. Use either the sales method or one of the gross income methods described in Regulations section 1.861-17.

Note: The line 4 totals will generally be less than the totals on lines 1 and 2 because the line 4 totals do not include the gross income and deductions that are implicitly apportioned to the residual grouping.

Column (a) Sales Method

Complete these columns only if the corporation elects the sales method of apportioning R&D deductions described in Regulations section 1.861-17(c). Enter in the spaces provided the three-digit SIC Code numbers (based upon the Standard Industrial Classification System) of the product lines to which the R&D deductions relate. See Regulations section 1.861-17(a)(2)(ii) and (iii) for details on choosing SIC codes and changing a product category.

Note: If the corporation has more than two product lines, see Computer-Generated Schedule H above.

Columns (a)(i) and (a)(iii)

Line 1. Enter the worldwide gross sales for the product lines.

Lines 3a through 3i. Enter the gross sales that resulted in gross income for each statutory grouping.

Columns (a)(ii) and (a)(iv)

Line 1. Enter the total R&D deductions connected with the product lines.

Line 2. Reduce the line 1 totals by legally mandated R&D (Regulations section 1.861-17(a)(4), and a 50% exclusive apportionment amount (Regulations section 1.861-17(b)(1)(i)).

The legally mandated R&D rules apply to R&D undertaken solely to meet legal requirements imposed by a particular political entity for improvement or marketing of specific products or processes if the corporation does not reasonably expect the results of that research to generate gross income (beyond de minimis amounts) outside a single geographic source.

Under the exclusive apportionment rules, 50% of the R&D deductions are apportioned exclusively to the statutory grouping of gross income, or the residual grouping of gross income, as the case may be, from the geographic source where the R&D activities which account for more than 50% of the amount of such deduction were performed. If the 50% test is not met, then no part of the deduction is apportioned under these rules.

Lines 3a through 3i. To figure the amount of R&D deductions to apportion to each statutory grouping, divide the gross sales apportioned to the statutory grouping by the worldwide gross sales for the product line. Multiply the result by the R&D deductions to be apportioned.

Note: If the corporation owns an interest in more than one noncontrolled section 902 corporation, had section 901(j) income from more than one sanctioned country, or had income re-sourced by treaty for more than one country, see Computer-Generated Schedule H on page 8.

Example 1. To determine the amount to enter on line 3a, column (a)(ii):

1. Divide the amount on line 3a, column (a)(i) by the amount on line 1, column (a)(i).
2. Multiply the result by the amount on line 2, column (a)(ii).

Example 2. To determine the amount to enter on line 3b, column (a)(iv):

1. Divide the amount on line 3b, column (a)(iii) by the amount on line 1, column (a)(iii).
2. Multiply the result by the amount on line 2, column (a)(iv).

Column (b) Gross Income Methods

Complete these columns only if the corporation elects one of the gross income methods of apportioning R&D deductions described in Regulations section 1.861-17(d)(2) and (3). Check the box for the option used. Use Option 1 only if certain conditions are met. See Regulations section 1.861-17(d)(2).

Column (b)(vi)

Line 1. Enter the total gross income (excluding exempt income according to Temporary Regulations section 1.861-8T(d)(2)).

Lines 3a through 3i. Enter the gross income within each statutory grouping.

Column (b)(vii)

Line 1. Enter the total R&D deductions.

Line 2. Reduce the line 1 totals by legally mandated R&D (Regulations section 1.861-17(a)(4)), and a 25% exclusive apportionment amount (Regulations section 1.861-17(b)(1)(ii)).

Lines 3a through 3i. If Option 1 is checked, divide the gross income apportioned to the statutory grouping by the total gross income and multiply the result by the R&D deductions to be apportioned. If Option 2 is checked, enter the appropriate amount as described in Regulations section 1.861-17(d)(3).

Part II - Interest Deductions, All Other Deductions, and Total Deductions

Note: The line 4 totals will generally be less than the totals on lines 1 and 2 because the line 4 totals do not include the gross income and deductions that are implicitly apportioned to the residual grouping.

Columns (a)(i) through (b)(iv)

Use these columns to apportion interest deductions. See Temporary Regulations sections 1.861-8T through 1.861-13T for rules on the apportionment of interest deductions.

Columns (a) and (b) are subdivided into Nonfinancial Corporations and Financial Corporations. In allocating interest deductions, members of an affiliated group that are financial corporations must be treated as a separate affiliated group. Complete columns (a)(ii) and (b)(iv) for members of the corporation's affiliated group that are financial corporations and columns (a)(i) and (b)(iii) for members that are nonfinancial corporations.

See Regulations section 1.861-11 for the definition of an affiliated group and special rules for section 936 corporations.

Columns (a)(i) and (a)(ii)

Line 1a. Enter the average of the total assets of the affiliated group. See Temporary Regulations section 1.861-9T(g)(2) for the definition of average for these purposes.

Line 1b. Enter the assets included on line 1a that are characterized as excess related party indebtedness. See Temporary Regulations section 1.861-10T(e) for an exception to the general rule of fungibility for excess related party indebtedness.

Line 1c. Enter all other assets that attract specifically allocable interest deductions. See Temporary Regulations section 1.861-10T for other exceptions to the general rule of fungibility (such as qualified nonrecourse indebtedness and integrated financial transactions).

Line 1d. Enter the total of the exempt assets and assets without directly identifiable yield that are to be excluded from the interest apportionment formula (Temporary Regulations sections 1.861-8T(d)(2) and 1.861-9T(g)(3)).

Lines 3a through 3k. The assets on line 2 are characterized as assets in one of the statutory groupings or as belonging to the residual grouping. Enter the value of the assets in each of the statutory groupings on line 3a through 3k. See Temporary Regulations sections 1.861-9T(g)(3), 1.861-12T(g)(2), and 1.861-12T(h)(2) for the rules for characterizing the assets.

Columns (b)(iii) and (b)(iv)

Line 1a. Enter the total interest deductions for the members of the corporation's affiliated group. These include any expense that is currently deductible under section 163 (including original issue discount), and interest equivalents. See Temporary Regulations section 1.861-9T for the definition of interest equivalents and a list of the sections that disallow or suspend interest deductions or require the capitalization of interest deductions.

Line 1b. Enter the interest deductions associated with the assets on line 1b of columns (a)(i) and (a)(ii), respectively, that attract specifically allocable interest deductions under Temporary Regulations section 1.861-10T(e).

Note: These interest deductions will be divided among the statutory groupings and will appear as a definitely allocable deduction in Schedule A, column 9(d).

Line 1c. Enter the interest deductions associated with the assets on line 1c of columns (a)(i) and (a)(ii), respectively, that attract specifically allocable interest deductions.

Lines 3a through 3k. To figure the amount of interest deductions to apportion to each statutory grouping, divide the assets apportioned to the grouping by the total assets apportioned and multiply the result by the interest deductions to be apportioned.

Example 1. To figure the amount to enter on line 3a, column (b)(iii): (a) divide the amount entered on line 3a, column (a)(i) by the amount on line 2, column (a)(i); and (b) multiply the result by the amount on line 2, column (b)(iii).

Example 2. To figure the amount to enter on line 3b, column (b)(iv): (a) divide the amount on line 3b, column (a)(ii) by the amount on line 2, column (a)(ii); and (b) multiply the result by the amount on line 2, column (b)(iv).

Column (c)

Complete this column to apportion all other deductions not definitely allocable (other than interest deductions and R&D deductions). See Regulations sections 1.861-8 and 1.861-14 and Temporary Regulations sections 1.861-8T and 1.861-14T.

Line 1a. Enter the total other deductions. Examples include: stewardship expenses; legal and accounting expenses; and other expenses related to certain supportive functions such as overhead, general and administrative, advertising, and marketing.

Lines 3a through 3k. Enter the amounts apportioned to each statutory grouping.

Schedules I and J

See the separate instructions for Schedule I and Schedule J to see if the corporation must file these schedules.

Foreign Country and U.S. Possession Codes

Enter the following codes in the appropriate columns as requested in Schedule A, Schedule C, Schedule D, and Schedule E.

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The time needed to complete and file this form and related schedules will vary depending on individual circumstances. The estimated average times are:

If you have comments concerning the accuracy of these time estimates or suggestions for making this form and related schedules simpler, we would be happy to hear from you. See the instructions for the tax return with which this form is filed.

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