Form 5712-A                  Election and Verification of the Cost Sharing or 
(Rev. December 2003)            Profit Split Method Under Section 936(h)(5)                                OMB No. 1545-0215 
Department of the Treasury 
Internal Revenue Service                              Attach to Schedule P (Form 5735) 
The corporation named below elects under section 936(h)(5) to use the cost sharing or profit split method for income tax purposes. 
Name of corporation                                                                           Employer identification number 

Enter the possession product to which this form relates                                       SIC code               
                                            Significant Business Presence Tests 
Note: Corporations engaged in start-up operations in a possession may be able to reduce the percentages computed on lines 3 and 8 
below. See the instructions for start-up operations. 
Part I    Tests Used To Qualify for Cost Sharing or Profit Split Method 
          Complete the column and lines that apply for the method you elected and the test you meet. 
Direct Labor Test                                                                             Cost Sharing           Profit Split 
1    Possessions corporation’s direct labor costs 
2    Total direct labor costs of affiliated group 
3    Divide line 1 by line 2 
     If line 3 is at least 65% (see the instructions for start-up operations for exceptions), 
     you meet the direct labor test and you qualify to use the cost sharing method. To 
     see if you qualify for the profit split method, answer the question on line 18. If line 
     3 is less than 65%, you do not meet the direct labor test. Complete lines 4 through 
     8 to see if you qualify under the value added test. 
Value Added Test 
4    Production costs of possessions corporation 
5    Gross receipts on sales or dispositions of possession product by the affiliated group 
     to unrelated parties 
6    Cost of direct material purchased from unrelated suppliers used in the production 
     of the possession product 
7    Subtract line 6 from line 5 
8    Divide line 4 by line 7 
     If line 8 is at least 25% (see the instructions for start-up operations for exceptions), 
     you meet the value added test and you qualify to use the cost sharing method. 
     To see if you qualify for the profit split method, answer the question on line 18. If 
     line 8 is less than 25%, you do not meet the value added test. Complete lines 9 
     through 15 to see if you qualify under the alternative test. 
Part II   Alternative Test Used To Qualify for Cost Sharing or Profit Split Method 
9    Direct labor costs of possessions corporation 
10   Direct labor costs of affiliated group 
11   Divide line 9 by line 10 
     If line 11 is at least 50%, go to line 12. If line 11 is less than 50%, you do not meet 
     the alternative test. 
12   Base period construction costs 
13   Add lines 9 and 12 
14   Add lines 10 and 12 
15   Divide line 13 by line 14 
     If line 15 is at least 70%, you meet the alternative test and you qualify to use the 
     cost sharing method. To see if you qualify for the profit split method, answer the 
     question on line 18. If line 15 is less than 70%, you do not meet the alternative test. 
Part III  Start-up Operations (see instructions) 
16   If the corporation is engaged in start-up operations, check this box                                             
17   Enter the beginning date of the tax year the possessions corporation began producing the product in 
     the possession                                                                            
Part IV   Other Information 
18   If you are claiming the profit split method: Is the possession product manufactured (as defined in Regulations 
     section 1.954-3(a)(4)) in the possession?                                                                       Yes          No 
     If “No,” you do not qualify to use the profit split method of computing taxable income. 
     Note: Affiliated group members must attach a list showing name, address, and employer identification number of all members of the group. 
For Paperwork Reduction Act Notice, see instructions on back.             Cat. No. 61166D     Form         5712-A    (Rev. 12-2003) 

Form 5712-A (Rev. 12-2003)                                                                                                               Page 2 

Instructions                                                              Definitions 
Section references are to the Internal Revenue Code unless                Possession Product 
otherwise noted. 
                                                                          “Possession product” means an item of property which is the result 
Purpose of Form                                                           of a manufacturing process. The term “product” includes component 
Possession corporations complete Form 5712-A:                             products, integrated products, and end-product forms. An affiliated 
                                                                          group may establish reasonable groupings of possession products 
● To elect the cost sharing method or the profit split method of          as a single product. New groupings may be established each year. 
computing taxable income for all possession products in a product         The Commissioner may disallow any grouping that materially distorts 
area (see SIC Code, below) and                                            income or the significant business presence test. See Regulations 
● To show in subsequent tax years that the corporation continues to       section 1.936-5(a) for more details. 
have a “significant business presence” (see below) in the possession      Direct labor 
with regard to the product or product area for that tax year. 
  Once an election is made, it generally applies for that year and all    This is labor associated with units of production. Basic 
subsequent tax years, and may be revoked only with the consent of         compensation, overtime, holiday and vacation pay, shift differential, 
the Commissioner.                                                         payroll taxes, contributions to unemployment benefit plans, and 
                                                                          certain types of payments for sick leave are all part of direct labor if 
Note: All members of an affiliated group must consent to the              they can be associated with production. Direct labor costs are only 
election. See Regulations section 1.936-7(a) for details.                 those costs that are inventoriable under section 471. 
How To File                                                               Production costs 
Attach Form 5712-A to Schedule P (Form 5735), Allocation of               These include direct labor costs and fixed and variable indirect 
Income and Expenses Under Section 936(h)(5), and file with                production costs. Only those costs that are inventoriable under 
Form 5735, Possessions Corporation Tax Credit (Under Sections             section 471 are qualified production costs. 
936 and 30A).                                                             Base period construction costs 
SIC Code                                                                  These costs are the average construction costs incurred by or on 
                                                                          behalf of the possessions corporation for services in the possession 
An election to use the cost sharing or profit split method applies to     during the current and preceding 4 tax years for section 1250 
all products in a product area. In the space at the top of the form for   property. This property must be used to manufacture the product or 
“SIC code,” enter the three-digit code for the product or product         to render the services in the possession, and must represent the 
area for which this Form 5712-A is being filed. See the Standard          original use of the section 1250 property. If the possessions 
Industrial Classification Manual for the proper code for the product      corporation did not exist during any year or years in the base period, 
or product area.                                                          the total amount of base period construction costs for such year or 
                                                                          years is zero. 
Significant Business Presence Tests 
                                                                          Manufacturing in a Possession 
The possessions corporation must show that it had a significant 
business presence in the possession for the tax year by meeting one       The rules under Regulations section 1.954-3(a)(4) apply in 
of the tests in Parts I and II. Corporations that use the profit split    determining if the possession product has been manufactured in a 
method must also certify that the possession product was                  possession. Manufacturing has taken place if: 
manufactured in the possession.                                           1. The product has been substantially transformed by the 
  If the corporation is using the cost sharing method, it must meet       possessions corporation in the possession; 
one of the following tests:                                               2. Operations performed by the possessions corporation in the 
● Direct labor test (Part I)                                              possession for the property are substantial and are generally 
                                                                          considered to constitute the manufacture or production of 
● Value added test (Part I)                                               property; or 
● Alternative test (Part II)                                              3. Conversion costs incurred by the possessions corporation in the 
  If the corporation is using the profit split method, it must:           possession, including direct labor, factory burden, testing of 
● Meet one of the tests specified above and:                              components before incorporation into an end product, and testing of 
                                                                          the manufactured product before sales, are at least 20% of the total 
● Answer “Yes” to the question on line 18 in Part IV.                     cost of goods sold of the possessions corporation. Packaging, 
                                                                          repackaging, labeling, or minor assembly operations do not qualify 
Start-up Operations                                                       as manufacturing. 
Products that were not previously produced (or services that were 
not previously rendered) in the possession are eligible for a 3-year      Paperwork Reduction Act Notice. We ask for the information on 
phase-in of the 65% direct labor test (line 3) and the 25% value          this form to carry out the Internal Revenue laws of the United States. 
added test (line 8), beginning with the year the corporation first starts You are required to give us the information. We need it to ensure 
to sell the product (or provide the service). For more information, see   that you are complying with these laws and to allow us to figure and 
Regulations section 1.936-5(b)(7). The percentages that apply during      collect the right amount of tax. 
the phase-in are:                                                         You are not required to provide the information requested on a 
                                                                          form that is subject to the Paperwork Reduction Act unless the form 
                                        Year                              displays a valid OMB control number. Books or records relating to a 
                                  1          2                  3         form or its instructions must be retained as long as their contents 
                                                                          may become material in the administration of any Internal Revenue 
65% Direct labor test        35%        45%                 55%           law. Generally, tax returns and return information are confidential, as 
                                                                          required by section 6103. 
25% Value added test         10%        15%                 20% 
                                                                          The time needed to complete and file this form will vary depending 
                                                                          on individual circumstances. The estimated average time is: 
Line 3. Use the applicable percentage from the chart above (instead 
of 65%).                                                                  Recordkeeping                                            5 hr., 15 min. 
Line 8. Use the applicable percentage from the chart above (instead       Learning about the law or the form                             53 min. 
of 25%).                                                                  Preparing and sending the form to the IRS                1 hr., 1 min. 
                                                                          If you have any comments concerning the accuracy of these time 
Signature                                                                 estimates or suggestions for making this form simpler, we would be 
By filing Form 5712-A, the taxpayer declares it has met all               happy to hear from you. See the instructions for the tax return with 
requirements for a valid election under section 936(h)(5). All signed     which this form is filed. 
consents of its affiliated members will be made available upon 
request. See Regulations section 1.936-7(a) for more details.