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 (e.g. 30 % EBITDA AND 3 : 1 debt-equity).	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