Transfer Pricing Algorithm WIP - Revision history

Zhengxiao.ying@algonomia.com: added example (Canada) of when multiple rows can coexist in Rules

2025-06-13T16:56:06Z

added example (Canada) of when multiple rows can coexist in Rules

← Older revision		Revision as of 16:56, 13 June 2025
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	\|Thin-Cap\|\|ATP Thin-Cap in scope\|\|Flags whether any thin-capitalisation restriction applies to the entity.\|\|Boolean\|\|One per segment\|\|No, default False		\|Thin-Cap\|\|ATP Thin-Cap in scope\|\|Flags whether any thin-capitalisation restriction applies to the entity.\|\|Boolean\|\|One per segment\|\|No, default False
	\|-		\|-
	\|Thin-Cap\|\|ATP Thin-Cap rule type\|\|Chooses the statutory approach.<br>• '''Fixed-Ratio''' – a cap expressed as A / B ≤ Threshold (covers debt-equity, interest-EBITDA, interest-assets, etc.).<br>• '''Safe-Harbour-None''' – no mechanical limitation; deduct all interest.\|\|Enum:{Fixed-Ratio; Safe-Harbour-None}\|\|Several rows may coexist when the jurisdiction has multiple interest expense limitation rules. For example, Canada Income Tax Act 18.4 mentions "... on outstanding debts to specified non-residents that ... exceeds (ii) 1.5 times the equity amount of the corporation or trust for the year ...", while Excessive interest and financing expenses (IFE) limitation rules contained in 18.2 and 18.21 mentions that "The cap on net IFE is equal to a fixed ratio of adjusted taxable income (ATI): 30% ..." \|\|Yes if “in scope” is True		\|Thin-Cap\|\|ATP Thin-Cap rule type\|\|Chooses the statutory approach.<br>• '''Fixed-Ratio''' – a cap expressed as A / B ≤ Threshold (covers debt-equity, interest-EBITDA, interest-assets, etc.).<br>• '''Safe-Harbour-None''' – no mechanical limitation; deduct all interest.\|\|Enum:{Fixed-Ratio; Safe-Harbour-None}\|\|Several rows may coexist when the jurisdiction has multiple interest expense limitation rules. For example, Canada [https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-18.html Income Tax Act 18.4] mentions "... on outstanding debts to specified non-residents that ... exceeds (ii) 1.5 times the equity amount of the corporation or trust for the year ...", while [https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/excessive-interest-financing-expenses-limitation-rules.html Excessive interest and financing expenses (IFE) limitation rules] contained in 18.2 and 18.21 mentions that "The cap on net IFE is equal to a fixed ratio of adjusted taxable income (ATI): 30% ..." \|\|Yes if “in scope” is True
	\|-		\|-
	\|Thin-Cap\|\|ATP Fixed-Ratio numerator\|\|Variable '''A''' in the ratio to be tested (what is limited).\|\|Enum:{NetInterestExpense; DebtRelatedParty; DebtTotal}\|\|One per Fixed-Ratio row\|\|Yes for Fixed-Ratio		\|Thin-Cap\|\|ATP Fixed-Ratio numerator\|\|Variable '''A''' in the ratio to be tested (what is limited).\|\|Enum:{NetInterestExpense; DebtRelatedParty; DebtTotal}\|\|One per Fixed-Ratio row\|\|Yes for Fixed-Ratio

Zhengxiao.ying@algonomia.com at 16:55, 13 June 2025

2025-06-13T16:55:03Z

← Older revision		Revision as of 16:55, 13 June 2025
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	\|Thin-Cap\|\|ATP Thin-Cap in scope\|\|Flags whether any thin-capitalisation restriction applies to the entity.\|\|Boolean\|\|One per segment\|\|No, default False		\|Thin-Cap\|\|ATP Thin-Cap in scope\|\|Flags whether any thin-capitalisation restriction applies to the entity.\|\|Boolean\|\|One per segment\|\|No, default False
	\|-		\|-
	\|Thin-Cap\|\|ATP Thin-Cap rule type\|\|Chooses the statutory approach.<br>• '''Fixed-Ratio''' – a cap expressed as A / B ≤ Threshold (covers debt-equity, interest-EBITDA, interest-assets, etc.).<br>• '''Safe-Harbour-None''' – no mechanical limitation; deduct all interest.\|\|Enum:{Fixed-Ratio; Safe-Harbour-None}\|\|Several rows may coexist (e.g. 30 % ~~EBITDA '''AND''' 3 : 1 debt-equity)~~.\|\|Yes if “in scope” is True		\|Thin-Cap\|\|ATP Thin-Cap rule type\|\|Chooses the statutory approach.<br>• '''Fixed-Ratio''' – a cap expressed as A / B ≤ Threshold (covers debt-equity, interest-EBITDA, interest-assets, etc.).<br>• '''Safe-Harbour-None''' – no mechanical limitation; deduct all interest.\|\|Enum:{Fixed-Ratio; Safe-Harbour-None}\|\|Several rows may coexist when the jurisdiction has multiple interest expense limitation rules. For example, Canada Income Tax Act 18.4 mentions "... on outstanding debts to specified non-residents that ... exceeds (ii) 1.5 times the equity amount of the corporation or trust for the year ...", while Excessive interest and financing expenses (IFE) limitation rules contained in 18.2 and 18.21 mentions that "The cap on net IFE is equal to a fixed ratio of adjusted taxable income (ATI): 30% ..." \|\|Yes if “in scope” is True
	\|-		\|-
	\|Thin-Cap\|\|ATP Fixed-Ratio numerator\|\|Variable '''A''' in the ratio to be tested (what is limited).\|\|Enum:{NetInterestExpense; DebtRelatedParty; DebtTotal}\|\|One per Fixed-Ratio row\|\|Yes for Fixed-Ratio		\|Thin-Cap\|\|ATP Fixed-Ratio numerator\|\|Variable '''A''' in the ratio to be tested (what is limited).\|\|Enum:{NetInterestExpense; DebtRelatedParty; DebtTotal}\|\|One per Fixed-Ratio row\|\|Yes for Fixed-Ratio

Zhengxiao.ying@algonomia.com at 16:18, 13 June 2025

2025-06-13T16:18:14Z

← Older revision		Revision as of 16:18, 13 June 2025
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	ATP Excess Interest Carry-forward N = €500 000		ATP Excess Interest Carry-forward N = €500 000
	ΔPBT_Thin-Cap = –€500 000		ΔPBT_Thin-Cap = –€500 000
	New_ATP_PBT = ~~ATP PBT~~ – €500 000 + ΔPBT_WHT		New_ATP_PBT = ATP_PBT – €500 000 + ΔPBT_WHT

Zhengxiao.ying@algonomia.com at 16:16, 13 June 2025

2025-06-13T16:16:43Z

Show changes

Zhengxiao.ying@algonomia.com: Added and modified WIP page for Thin-Capitalisation in TP Algorithm

2025-06-13T13:15:14Z

Added and modified WIP page for Thin-Capitalisation in TP Algorithm

← Older revision		Revision as of 13:15, 13 June 2025
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	=== Context ===		=== Context ===
	This module plugs into the Transfer Pricing Algorithm ''after'' the TP-convergence loop and before the withholding-tax stage, adjusting ATP PBT and creating carry-forward variables where interest is disallowed.		This module plugs into the Transfer Pricing Algorithm '''''<u>after</u>''''' the TP-convergence loop and '''<u>before</u>''' the withholding-tax stage, adjusting ATP PBT and creating carry-forward variables where interest is disallowed.

	=== Data structure additions ===		=== Data structure additions ===
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	\|Couple (Decimal;ISO 3 Currency Code)		\|Couple (Decimal;ISO 3 Currency Code)
	\|If multiple defined, are aggregated for computation		\|If multiple defined, are aggregated for computation
	\|Yes if Thin-Cap in scope; otherwise optional		\|Yes, if Thin-Cap in scope; otherwise optional
	\|-		\|-
	\|Financials		\|Financials
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	\|Couple (Decimal;ISO 3 Currency Code)		\|Couple (Decimal;ISO 3 Currency Code)
	\|If multiple defined, are aggregated for computation		\|If multiple defined, are aggregated for computation
	\|Yes if Thin-Cap in scope		\|Yes, if Thin-Cap in scope
	\|-		\|-
	\|Financials		\|Financials
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	\|Couple (Decimal;ISO 3 Currency Code)		\|Couple (Decimal;ISO 3 Currency Code)
	\|If multiple defined, are aggregated for computation		\|If multiple defined, are aggregated for computation
	\|No – required only for EBITDA-based rules		\|No, required only for EBITDA-based rules
	\|-		\|-
	\|Financials		\|Financials
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	\|Boolean		\|Boolean
	\|Only one value acceptable per segment		\|Only one value acceptable per segment
	\|No, default False		\|No, default False
	\|-		\|-
	\|Thin-Cap		\|Thin-Cap
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	=== Computational step – Thin-Cap limitation ===		=== Computational step – Thin-Cap limitation ===
	This step is performed entity-by-entity at the “Declaring Entity” level.		This step is performed '''entity-by-entity''' at the “Declaring Entity” level.

	# Compute the Allowable Interest Ceiling (AIC)
	~~#* Debt-Equity rule: <nowiki>AIC = min(NI ; (Debt/Equity Safe-Harbour × ATP Equity – Thin-Cap))</nowiki>~~
	~~#* Fixed-Ratio / EBITDA rule: <nowiki>AIC = min(NI ; Fixed-Ratio % × ATP EBITDA)</nowiki>~~
	~~#* Group-Ratio election: substitute the higher of Fixed-Ratio % and Group-Ratio % in the above.~~
	# Apply the de-minimis threshold
	~~If <nowiki>NI ≤ De-minimis</nowiki> → entire NI is deductible → skip to step 4.~~
	# Determine current-year disallowance
	~~<nowiki>Disallowed_N = max(0 ; NI – AIC)</nowiki>~~
	# Utilise prior-year carry-forward
	~~<nowiki>Allowed_from_carry = min(Excess Carry-forward N-1 ; AIC – (NI – Disallowed_N))</nowiki>~~
	~~<nowiki>Disallowed_N = Disallowed_N – Allowed_from_carry</nowiki>~~
	# Update variables
	* <nowiki>ΔPBT_Thin-Cap = (-1) × Disallowed_N</nowiki>
	* <nowiki>ATP Disallowed Interest N = Disallowed_N</nowiki>
	* <nowiki>ATP Excess Interest Carry-forward N = Disallowed_N</nowiki> (subject to carry-forward period)
	* Replace <nowiki>ATP PBT</nowiki> in the downstream Tax losses stage with
	~~<nowiki>New_ATP_PBT = ATP PBT + ΔPBT_Thin-Cap + ΔPBT_WHT (paid + due)</nowiki>~~

			# '''Compute the Allowable Interest Ceiling (AIC)'''
			#* Debt-Equity rule: AIC = min(Net Interest (NI) ; (Debt/Equity Safe-Harbour × ATP Equity – Thin-Cap))
			#* Fixed-Ratio / EBITDA rule: <nowiki>AIC = min(NI ; Fixed-Ratio % × ATP EBITDA)</nowiki>
			#* Group-Ratio election: substitute the higher of Fixed-Ratio % and Group-Ratio % in the above.
			# '''Apply the de-minimis threshold'''
			#* If <nowiki>NI ≤ De-minimis</nowiki> → entire NI is deductible → skip to step 4.
			# '''Determine current-year disallowance'''
			#* <nowiki>Disallowed_N = max(0 ; NI – AIC)</nowiki>
			# '''Utilise prior-year carry-forward:'''
			#* <nowiki>Allowed_from_carry = min(Excess Carry-forward N-1 ; AIC – (NI – Disallowed_N))</nowiki>
			#* <nowiki>Disallowed_N = Disallowed_N – Allowed_from_carry</nowiki>
			# '''Update variables''':
			## <nowiki>ΔPBT_Thin-Cap = (-1) × Disallowed_N</nowiki>
			## <nowiki>ATP Disallowed Interest N = Disallowed_N</nowiki>
			## <nowiki>ATP Excess Interest Carry-forward N = Disallowed_N</nowiki> (subject to carry-forward period)
			## Replace <nowiki>ATP PBT</nowiki> in the downstream '''Tax losses''' stage with <nowiki>New_ATP_PBT = ATP PBT + ΔPBT_Thin-Cap + ΔPBT_WHT (paid + due)</nowiki>
	=== Interaction with other modules ===		=== Interaction with other modules ===
	* Transfer Pricing convergence: thin-cap uses the post-TP interest figures; it does ~~not~~ trigger another TP iteration.		* '''Transfer Pricing convergence''': thin-cap uses the '''post-TP''' interest figures; it does NOT trigger another TP iteration.
	* Withholding-tax engine: unchanged – WHT remains computed on gross interest flows.		* '''Withholding-tax engine''': unchanged – WHT remains computed on gross interest flows.
	* Tax-loss computation: use <nowiki>New_ATP_PBT</nowiki> that includes thin-cap adjustment.		* '''Tax-loss computation''': use <nowiki>New_ATP_PBT</nowiki> that includes thin-cap adjustment.
	* Genetic optimiser: may treat the Debt/Equity ratio, interest rate, or Group-Ratio election as additional variables, bounded by statutory rules.		* '''Genetic optimiser''': may treat the '''Debt/Equity ratio''', '''interest rate''', or '''Group-Ratio election''' as additional variables, bounded by statutory rules.

	=== Summary of new labels ===		=== Summary of new labels ===

Zhengxiao.ying@algonomia.com: Created page with "(WIP) == Thin-Capitalisation (“Thin-Cap”) module == === Context === This module plugs into the Transfer Pricing Algorithm ''after'' the TP-convergence loop and before the withholding-tax stage, adjusting ATP PBT and creating carry-forward variables where interest is disallowed. === Data structure additions === ==== Data ==== {| class="wikitable sortable mw-collapsible mw-collapsed" |+Input Data Points – Thin-Cap !Role !Label !Definition !Typing !Multiplicit..."

2025-06-13T12:55:13Z

Created page with "(WIP) == Thin-Capitalisation (“Thin-Cap”) module == === Context === This module plugs into the Transfer Pricing Algorithm ''after'' the TP-convergence loop and **before** the withholding-tax stage, adjusting ATP PBT and creating carry-forward variables where interest is disallowed. === Data structure additions === ==== Data ==== {| class="wikitable sortable mw-collapsible mw-collapsed" |+Input Data Points – Thin-Cap !Role !Label !Definition !Typing !Multiplicit..."

New page

(WIP)

== Thin-Capitalisation (“Thin-Cap”) module ==

=== Context ===
This module plugs into the Transfer Pricing Algorithm ''after'' the TP-convergence loop and **before** the withholding-tax stage, adjusting ATP PBT and creating carry-forward variables where interest is disallowed.

=== Data structure additions ===
==== Data ====
{| class="wikitable sortable mw-collapsible mw-collapsed"
|+Input Data Points – Thin-Cap
!Role
!Label
!Definition
!Typing
!Multiplicity behavior
!Mandatory
|-
|Financials
|ATP Debt – Related-party
|Average book value of debt owed to associated enterprises during the period
|Couple (Decimal;ISO 3 Currency Code)
|If multiple defined, are aggregated for computation
|No, if absent and Thin-Cap in scope, assumed 0
|-
|Financials
|ATP Debt – Third-party
|Average book value of debt owed to independent lenders
|Couple (Decimal;ISO 3 Currency Code)
|If multiple defined, are aggregated for computation
|No, if absent, assumed 0
|-
|Financials
|ATP Equity – Thin-Cap
|Book or tax equity relevant for thin-cap calculations (may differ from accounting equity)
|Couple (Decimal;ISO 3 Currency Code)
|If multiple defined, are aggregated for computation
|Yes **if** Thin-Cap in scope; otherwise optional
|-
|Financials
|ATP Net Interest Expense
|Net interest expense (interest expense – interest income) *after* TP adjustments, *before* thin-cap limitation
|Couple (Decimal;ISO 3 Currency Code)
|If multiple defined, are aggregated for computation
|Yes **if** Thin-Cap in scope
|-
|Financials
|ATP EBITDA
|Earnings before interest, tax, depreciation & amortisation (post-TP, pre-thin-cap)
|Couple (Decimal;ISO 3 Currency Code)
|If multiple defined, are aggregated for computation
|No – required only for EBITDA-based rules
|-
|Financials
|ATP Excess Interest Carry-forward N-1
|Disallowed interest from the previous year still available for future deduction
|Couple (Decimal;ISO 3 Currency Code)
|If multiple defined, are aggregated for computation
|No, default 0
|}

==== Rules ====
{| class="wikitable sortable mw-collapsible mw-collapsed"
|+Input Rules – Thin-Cap
!Role
!Label
!Definition
!Typing
!Multiplicity behavior
!Mandatory
|-
|Thin-Cap
|ATP Thin-Cap rule type
|Specifies which national limitation applies
|Single choice Enum : {Debt-Equity ; Fixed-Ratio ; EBITDA ; Group-Ratio ; Safe-Harbour-None}
|Only one value acceptable per analysis segment
|Yes if any entity flagged Thin-Cap in scope
|-
|Thin-Cap
|ATP Thin-Cap in scope
|Flags whether thin-capitalisation rules apply to the entity
|Boolean
|Only one value acceptable per segment
|No, default **False**
|-
|Thin-Cap
|ATP Debt/Equity Safe-Harbour ratio
|Maximum Debt ÷ Equity allowed (e.g. 3 : 1) for Debt-Equity type
|Decimal
|Only one value acceptable per segment
|Mandatory for Debt-Equity rules
|-
|Thin-Cap
|ATP Fixed-Ratio % EBITDA
|Maximum percentage of EBITDA deductible as net interest (e.g. 30 %)
|percentage
|Only one value acceptable per segment
|Mandatory for Fixed-Ratio / EBITDA rules
|-
|Thin-Cap
|ATP De-minimis interest threshold
|Amount of net interest always deductible regardless of ratios
|Couple (Decimal;ISO 3 Currency Code)
|Only one value acceptable per segment
|Optional – default 0
|-
|Thin-Cap
|ATP Group-Ratio election
|Allows use of a group ratio if more favourable than fixed ratio
|Boolean
|Only one value acceptable per segment
|Optional – default False
|-
|Thin-Cap
|ATP Group-Ratio %
|Group net-interest ÷ EBITDA ratio when election taken
|percentage
|Only one value acceptable per segment
|Required if Group-Ratio election = True
|-
|Thin-Cap
|ATP Excess Interest carry-forward period
|Number of years disallowed interest may be carried forward
|Integer
|Only one value acceptable per segment
|Optional – default ∞
|}

==== Taxation / Output ====
{| class="wikitable"
|+New Output Data Points
!Role
!Label
!Definition
|-
|Taxation
|ATP Disallowed Interest N
|Net interest expense denied in the current year (negative adjustment to ATP PBT)
|-
|Taxation
|ATP Excess Interest Carry-forward N
|Disallowed interest to carry forward to future years, after utilisation tests
|}

=== Computational step – Thin-Cap limitation ===
This step is performed **entity-by-entity at the “Declaring Entity” level**.

# **Compute the Allowable Interest Ceiling (AIC)**
#* *Debt-Equity rule*: <nowiki>AIC = min(NI ; (Debt/Equity Safe-Harbour × ATP Equity – Thin-Cap))</nowiki>
#* *Fixed-Ratio / EBITDA rule*: <nowiki>AIC = min(NI ; Fixed-Ratio % × ATP EBITDA)</nowiki>
#* *Group-Ratio election*: substitute the higher of Fixed-Ratio % and Group-Ratio % in the above.
# **Apply the de-minimis threshold**
If <nowiki>NI ≤ De-minimis</nowiki> → entire NI is deductible → skip to step 4.
# **Determine current-year disallowance**
<nowiki>Disallowed_N = max(0 ; NI – AIC)</nowiki>
# **Utilise prior-year carry-forward**
<nowiki>Allowed_from_carry = min(Excess Carry-forward N-1 ; AIC – (NI – Disallowed_N))</nowiki>
<nowiki>Disallowed_N = Disallowed_N – Allowed_from_carry</nowiki>
# **Update variables**
* <nowiki>ΔPBT_Thin-Cap = (-1) × Disallowed_N</nowiki>
* <nowiki>ATP Disallowed Interest N = Disallowed_N</nowiki>
* <nowiki>ATP Excess Interest Carry-forward N = Disallowed_N</nowiki> (subject to carry-forward period)
* Replace <nowiki>ATP PBT</nowiki> in the downstream **Tax losses** stage with
<nowiki>New_ATP_PBT = ATP PBT + ΔPBT_Thin-Cap + ΔPBT_WHT (paid + due)</nowiki>

=== Interaction with other modules ===
* **Transfer Pricing convergence**: thin-cap uses the *post-TP* interest figures; it does **not** trigger another TP iteration.
* **Withholding-tax engine**: unchanged – WHT remains computed on gross interest flows.
* **Tax-loss computation**: use <nowiki>New_ATP_PBT</nowiki> that includes thin-cap adjustment.
* **Genetic optimiser**: may treat the *Debt/Equity ratio*, *interest rate*, or *Group-Ratio election* as additional variables, bounded by statutory rules.

=== Summary of new labels ===
;Data
:ATP Debt – Related-party • ATP Debt – Third-party • ATP Equity – Thin-Cap • ATP Net Interest Expense • ATP EBITDA • ATP Excess Interest Carry-forward N-1
;Rules
:ATP Thin-Cap rule type • ATP Thin-Cap in scope • ATP Debt/Equity Safe-Harbour ratio • ATP Fixed-Ratio % EBITDA • ATP De-minimis interest threshold • ATP Group-Ratio election • ATP Group-Ratio % • ATP Excess Interest carry-forward period
;Outputs
:ATP Disallowed Interest N • ATP Excess Interest Carry-forward N • ΔPBT_Thin-Cap