SECTION 1. OVERVIEW

On March 8, 1996, final regulations were published in the Federal Register (T.D. 8658, 1996–1 C.B. 161 [61 FR 9326]; Treas. Dec. Int. Rev. 8658), under section 1.882–5 regarding the determination of the interest expense deduction of a foreign corporation engaged in a U.S. trade or business. The Treasury Department and the Internal Revenue Service have monitored these provisions to ensure that they continue to produce results that are consistent with the policies underlying the regulations, in light of current economic circumstances. The Treasury Department and the IRS believe that, in the context of the banking industry, certain changes to the regulations will facilitate compliance. This notice describes such changes, which will apply to determine the interest expense deduction of a foreign corporation that is a bank, within the meaning of section 585(a)(2)(B) without regard to the second sentence thereof (hereafter “foreign bank”). The Treasury Department and IRS intend to issue regulations consistent with this notice.

The remainder of this notice is divided into seven sections. Section 2 provides relevant legal background. Section 3 provides guidance on the coordination of section 1.882–5 with treaties. Section 4 invites the submission of data and other information relevant to the consideration of a revised fixed ratio available for purposes of determination of U.S.-connected liabilities in Step 2 of section 1.882–5. Section 5 provides guidance on the determination of the applicable rate for excess interest under the adjusted U.S.-booked liabilities method in Step 3 of section 1.882–5. Section 6 solicits comments on coordination of Step 1 determination of U.S. assets on the adjusted or fair market value basis with Step 2 determination of U.S.-con

nected liabilities using the fixed or actual ratio. Section 7 provides information on submitting comments. Finally, section 8 provides drafting information.