Transfer Pricing Algorithm WIP

Thin-Capitalisation (“Thin-Cap”) module

Context

This module runs after the TP-convergence loop and before the withholding-tax stage. It caps interest deductibility, adjusts ATP PBT, and manages an interest carry-forward bucket.

Data structure additions

Data

Input Data Points – Thin-Cap

Role	Label	Definition	Typing	Multiplicity behaviour	Mandatory
Financials	ATP Debt – Related-party	Average debt owed to associated enterprises	Couple (Decimal; ISO 3 Currency)	Aggregate	No (=0 if absent)
Financials	ATP Debt – Third-party	Average debt owed to independent lenders	Couple (Decimal; ISO 3 Currency)	Aggregate	No (=0 if absent)
Financials	ATP Equity – Thin-Cap	Equity figure prescribed by local thin-cap rules	Couple (Decimal; ISO 3 Currency)	Aggregate	Yes if Thin-Cap in scope
Financials	ATP Net Interest Expense	Interest expense – interest income (post-TP)	Couple (Decimal; ISO 3 Currency)	Aggregate	Yes if Thin-Cap in scope
Financials	ATP EBITDA	EBITDA (after TP Adjustment)	Couple (Decimal; ISO 3 Currency)	Aggregate	Only for EBITDA-based rules
Financials	ATP Excess Interest Carry-forward N-1	Disallowed interest still available	Couple (Decimal; ISO 3 Currency)	Aggregate	No (default 0)

Rules

(multiple rows per entity allowed; tightest cap wins)

Input Rules – Thin-Cap

Role	Label	Definition	Typing / Domain	Multiplicity behaviour	Mandatory
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. • Fixed-Ratio – a cap expressed as A / B ≤ Threshold (covers debt-equity, interest-EBITDA, interest-assets, etc.). • 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 denominator	Variable B that forms the economic base.	Enum:{EBITDA; EBIT; PBT; EquityThinCap; TotalAssets; TaxableIncome; OperatingCashFlow}	One per Fixed-Ratio row	Yes for Fixed-Ratio
Thin-Cap	ATP Fixed-Ratio threshold	Numeric limit T. Enter 0 – 1 for percentage caps (e.g. 0.30 = 30 %) or > 1 for pure ratios (e.g. 3 = 3 : 1).	Decimal	One per Fixed-Ratio row	Yes for Fixed-Ratio
Thin-Cap	ATP De-minimis interest threshold	Absolute amount of net interest always deductible before applying any ratio test (e.g. €3 m in ATAD).	Couple (Decimal; ISO 3 Currency)	Several rows allowed (but typically one)	No, default 0
Thin-Cap	ATP Group-Ratio election	True if the taxpayer elects to substitute the Group-Ratio cap in this row (ATAD art. 4 §5; UK CIR).	Boolean	One per Fixed-Ratio row	No, default False
Thin-Cap	ATP Group-Ratio %	Group net-interest ÷ group EBITDA used when the election above is True.	Percentage	One per Fixed-Ratio row	Yes if election = True
Thin-Cap	ATP Excess-Interest carry-forward period	Number of years disallowed interest can be carried forward (FIFO bucket; ≥ 5 y for ATAD countries, ∞ allowed).	Integer (years)	One per segment	No, default ∞

Taxation / Output

New Output Data Points

Role	Label	Definition
Taxation	ATP Disallowed Interest N	Interest denied in current year (−PBT)
Taxation	ATP Excess Interest Carry-forward N	Disallowed interest carried forward

Computational step – Thin-Cap limitation

This step is executed entity-by-entity at the Declaring-Entity level.

1. Pre-checks
   • If Thin-Cap in scope = False ⇒ skip module.
2. Net interest expense (NI) after de-minimis
   • NI = max(0 ; ATP Net Interest Expense − ATP De-minimis interest threshold)
3. Allowable Interest Ceiling (AIC)
   • For each rule row i where rule type = Fixed-Ratio:
     • Fetch Numerator_i ← choose(NumeratorTag_i , data block)
     • Fetch Denominator_i ← choose(DenominatorTag_i , data block)
     • if Denominator_i = 0 → raise validation error
     • Threshold_i ← ATP Fixed-Ratio threshold_i
     • Cap_i ← Threshold_i × Denominator_i
     • if NumeratorTag_i ∈ { NetInterestExpense }:
       • AIC_i = min( NI , Cap_i )
     • if NumeratorTag_i ∈ { DebtRelatedParty ; DebtTotal }:
       • AllowedDebt = Cap_i
       • ActualDebt = Numerator_i
       • AllowedInterest = NI × AllowedDebt / ActualDebt (if ActualDebt > 0)
       • AIC_i = min( NI , AllowedInterest )
     • if Group-Ratio election_i = True (Apply group-ratio uplift if elected on this row):
       • GRCap = Group-Ratio %_i × Denominator_i
       • AIC_i = min( NI , max( Cap_i , GRCap ) )
   • Combine multiple rows:
     • AIC_final = MIN( AIC_i for all Fixed-Ratio rows )
     • If the entity has only one row and ATP Thin-Cap rule type = Safe-Harbour-None:
       • AIC_final = NI
4. Current-year disallowance
   • Disallowed_Before_Carry = max(0 ; NI − AIC_final)
5. Utilise carry-forward bucket (FIFO single pool)
   • Headroom = max( 0 ; AIC_final – ( NI – Disallowed_Before_Carry ) )
   • Allowed_from_carry = min(ATP Excess Interest Carry-forward N-1 ; Headroom)
   • Disallowed_N = Disallowed_Before_Carry − Allowed_from_carry
6. Update variables
   1. ΔPBT_Thin-Cap = − Disallowed_N
   2. ATP Disallowed Interest N = Disallowed_N
   3. ATP Excess Interest Carry-forward N = Disallowed_N (drops FIFO after ‘‘carry-forward period’’)
   4. Replace ATP_PBT downstream with: New_ATP_PBT = ATP PBT + ΔPBT_Thin-Cap + ΔPBT_WHT (paid + due)

Interaction with other modules

• TP convergence – uses after TP Ajustment interest; does NOT trigger another TP loop.
• Withholding-tax – unchanged (WHT on gross interest).
• Tax-loss computation – starts from New_ATP_PBT.
• Optimiser – may vary Debt/Equity Ratio or other Fixed Ratio, interest rate or Group-Ratio election. ΔPBT_Thin-Cap feeds into the objective function.

Example – Fixed-ratio cap that creates a disallowance

Data

Role	Label	Value
Matching	ATP Declaring Entity segmentation	("Entity"; "FR001")
Financials	ATP Debt – Related-party	(15 000 000; EUR)
Financials	ATP Debt – Third-party	(10 000 000; EUR)
Financials	ATP Equity – Thin-Cap	(8 000 000; EUR)
Financials	ATP Net Interest Expense	(4 000 000; EUR)
Financials	ATP EBITDA	(10 000 000; EUR)
Financials	ATP Excess Interest Carry-forward N-1	(0; EUR)

Rules

Role	Label	Value
Thin-Cap	ATP Thin-Cap in scope	True
Thin-Cap	ATP Thin-Cap rule type	Fixed-Ratio
Thin-Cap	ATP Fixed-Ratio numerator	NetInterestExpense
Thin-Cap	ATP Fixed-Ratio denominator	EBITDA
Thin-Cap	ATP Fixed-Ratio threshold	0.30
Thin-Cap	ATP De-minimis interest threshold	(500 000; EUR)
Thin-Cap	ATP Group-Ratio election	False
Thin-Cap	ATP Excess-Interest carry-forward period	5

Thin-Cap computation

• Step 1 – Pre-checks

 ATP Thin-Cap in scope = TRUE so continue with the following steps

• Step 2 – De-minimis

 ATP Net Interest Expense = €4 000 000
 ATP De-minimis interest threshold = €500 000
 NI = max(0 ; ATP Net Interest Expense − ATP De-minimis interest threshold) = €3 500 000

• Step 3 – Fixed-ratio cap

 Cap = 0.30 × EBITDA = €3 000 000  
 AIC_final = min(NI , Cap) = €3 000 000

• Step 4 – Disallowance before carry-forward

 Disallowed_Before_Carry = NI − AIC = €500 000

• Step 5 – Utilise carry-forward

 Prior bucket = €0 ⇒ Allowed_from_carry = €0  
 Disallowed_N = €500 000

• Step 6 – Outputs

 ATP Disallowed Interest N = €500 000  
 ATP Excess Interest Carry-forward N = €500 000  
 ΔPBT_Thin-Cap = –€500 000  
 New_ATP_PBT = ATP_PBT – €500 000 + ΔPBT_WHT