[Federal Register Volume 71, Number 159 (Thursday, August 17, 2006)]
[Proposed Rules]
[Pages 47459-47460]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-13409]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 71, No. 159 / Thursday, August 17, 2006 / 
Proposed Rules  

[[Page 47459]]



DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-120509-06]
RIN 1545-BF71


Determination of Interest Expense Deduction of Foreign 
Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary 
regulations.

-----------------------------------------------------------------------

SUMMARY: In the Rules and Regulations section of this issue of the 
Federal Register, the IRS is issuing temporary regulations under 
sections 882 and 884 relating to the determination of the interest 
expense deduction of foreign corporations engaged in a trade or 
business within the United States. These regulations update the 1996 
final interest expense allocation rules for foreign corporations and 
take into account changes in the foreign banking industry. The rule 
changes are necessary to conform the final regulations more closely to 
current operating conditions in the foreign banking industry, and to 
harmonize the deemed earnings repatriation from a foreign corporation's 
trade or business within the United States, with the manner in which 
dividends are repatriated from U.S. resident companies to their foreign 
shareholders. These regulations are expected to simplify compliance 
burdens for many foreign corporations that allocate interest expense to 
effectively connected income and provide greater latitude to taxpayers 
in determining when their effectively connected earnings are treated as 
remitted. The text of these regulations also serves as the text of 
these proposed regulations.

DATES: Written or electronic comments and requests for a public hearing 
must be received by November 15, 2006.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-120509-06), Internal 
Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 
20044. Submissions may be sent electronically, via the IRS Internet 
site at www.irs.gov/regs or via the Federal eRulemaking Portal at 
www.regulations.gov (IRS REG-120509-06).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Gregory 
Spring or Paul Epstein, (202) 622-3870, concerning submissions of 
comments, Richard A. Hurst, [email protected], or 
(202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collection of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington DC 20224. Comments on the collection of information should 
be received by October 16, 2006. Comments are requested specifically 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application or 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collections of information in these proposed regulations are in 
Sec. Sec.  1.882-5T(d)(5)(ii)(B) and 1.884-1T(e)(3)(iv). This 
collection of information is required to facilitate administrability of 
reporting of allocable expense from without the United States. Section 
1.882-5T(d)(5)(ii)(B) provides a simplified procedure for taxpayers to 
calculate an allocable amount of U.S. dollar denominated interest 
expense booked by foreign banks in foreign locations. The collection of 
information provides certainty of application and immediate 
verification in the advance review and resolution of such treatment on 
examination. Section 1.884-1T(e)(3)(iv) provides the identical 
collection of information that was promulgated in final regulations in 
TD 8432 (1992-2 CB 157). The rule provides an election to reduce 
liabilities for purposes of treating effectively connected earnings and 
profits as reinvested. It also requires that U.S. connected liabilities 
be reduced for purposes of determining the allocation of interest 
expense to effectively connected income. The collection of information 
facilitates identification and verification of the coordinated 
treatment of the sections 882 and 884 provisions in accordance with the 
time, place and manner restrictions for making the election. The 
collections of information are mandatory. The likely respondents are 
foreign banks.
    Estimated total annual reporting burden: 37.5.
    Estimated average annual burden hours per respondent: \1/2\ hour.
    Estimated number of respondents: 75.
    Estimated annual frequency of responses: annually.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    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.

[[Page 47460]]

Background

    In the Rules and Regulations section of this issue of the Federal 
Register, the IRS is issuing temporary regulations under sections 882 
and 884 relating to the determination of the interest expense deduction 
of foreign corporations engaged in a trade or business within the 
United States. The text of those regulations published in this issue of 
the Federal Register also serves as the text of these proposed 
regulations. The preamble to those temporary regulations explains the 
temporary regulations and these proposed regulations.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
the regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, this regulation has 
been submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and the Treasury Department specifically request comments 
on the clarity of the proposed regulations and how they can be made 
easier to understand. All comments will be available for public 
inspection and copying. A public hearing will be scheduled if requested 
by any person who timely submits comments. If a public hearing is 
scheduled, notice of the date, time and place for the hearing will be 
published in the Federal Register.

Drafting Information

    The principal authors of these regulations are Paul S. Epstein and 
Gregory A. Spring of the Office of Associate Chief Counsel 
(International).

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be 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 1.882-5 is amended to read as follows:
    1. Paragraphs (a)(1) through (a)(2), (a)(7), (a)(7)(i) through 
(a)(7)(ii), (b)(2)(ii)(A), (b)(3), (c)(2)(iv), (c)(4), 
(d)(2)(ii)(A)(2), (d)(2)(ii)(A)(3), (d)(2)(iii)(A), and (d)(5)(ii) are 
revised.
    2. Paragraph (d)(6) Example 5 is added.
    The revisions and addition read as follows:


Sec.  1.882-5  Determination of interest deduction.

    (a) * * *
    (a)(1) through (a)(2) [The text of this proposed amendment is the 
same as the text of Sec.  1.882-5T(a)(1) through (a)(2) published 
elsewhere in this issue of the Federal Register].
* * * * *
    (a)(7) [The text of this proposed amendment is the same as the text 
of Sec.  1.882-5T(a)(7) published elsewhere in this issue of the 
Federal Register].
* * * * *
    (b)(2)(ii)(A) [The text of this proposed amendment is the same as 
the text of Sec.  1.882-5T(b)(2)(ii)(A) published elsewhere in this 
issue of the Federal Register].
* * * * *
    (b)(2)(iv) [The text of this proposed amendment is the same as the 
text of Sec.  1.882-5T(b)(2)(iv) published elsewhere in this issue of 
the Federal Register].
* * * * *
    (b)(3) [The text of this proposed amendment is the same as the text 
of Sec.  1.882-5T(b)(3) published elsewhere in this issue of the 
Federal Register].
* * * * *
    (c)(2)(iv) [The text of this proposed amendment is the same as the 
text of Sec.  1.882-5T(c)(2)(iv) published elsewhere in this issue of 
the Federal Register].
* * * * *
    (c)(4) [The text of this proposed amendment is the same as the text 
of Sec.  1.882-5T(c)(4) published elsewhere in this issue of the 
Federal Register].
* * * * *
    (d)(2)(ii)(A)(2) through (3) [The text of these proposed amendments 
are the same as the text of Sec.  1.882-5T(d)(2)(ii)(A)(2) through (3) 
published elsewhere in this issue of the Federal Register].
* * * * *
    (d)(2)(iii)(A) [The text of this proposed amendment is the same as 
the text of Sec.  1.882-5T(d)(2)(iii)(A) published elsewhere in this 
issue of the Federal Register].
* * * * *
    (d)(5)(ii) [The text of this proposed amendment is the same as the 
text of Sec.  1.882-5T(d)(5)(ii) published elsewhere in this issue of 
the Federal Register].
* * * * *
    (d)(6) Example 5 [The text of this proposed amendment is the same 
as the text of Sec.  1.882-5T(d)(6) Example 5 published elsewhere in 
this issue of the Federal Register].
* * * * *
    Par. 3. Section 1.884-1 is amended by revising the entries for 
paragraphs Sec.  1.884-1(e)(3)(ii), (e)(3)(iv) and (e)(5) Example 2 to 
read as follows:


Sec.  1.884-1  Determination of interest deduction

* * * * *
    (e)(3)(ii) [The text of this proposed amendment is the same as the 
text of Sec.  1.884-1T(e)(3)(ii) published elsewhere in this issue of 
the Federal Register].
* * * * *
    (e)(3)(iv) [The text of this proposed amendment is the same as the 
text of Sec.  1.884-1T(e)(3)(iv) published elsewhere in this issue of 
the Federal Register].
* * * * *
    (e)(5) Example 2 [The text of this proposed amendment is the same 
as the text of Sec.  1.884-1T(e)(5) Example 2 published elsewhere in 
this issue of the Federal Register].
* * * * *

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
 [FR Doc. E6-13409 Filed 8-15-06; 8:45 am]
BILLING CODE 4830-01-P