Transfer Pricing Algorithm WIP

(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

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

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

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.

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

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 New_ATP_PBT 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