Undertaxed Profits Rule (UTPR) (2024)

The undertaxed profits rule (UTPR) allows a country to increase taxes on a business if that business is part of a larger company that pays less than the proposed global minimum tax of 15 percent in another jurisdiction. This is part of the Organisation for Economic Co-operation and Development’s (OECD) Global Tax Deal.

How Would an Undertaxed Profits Rule Work?

The undertaxed profits rule (UTPR) is one piece of the OECD Global Tax Deal aimed at limiting multinational corporate tax avoidance by changing international tax policy. The goal is to set a worldwide 15 percent minimum effective tax rate on corporate profits and enforce it through a set ofinterconnected rules. These rules are designed to apply to multinational companies with more than €750 million (US $789 million) in total global revenues.

First, an income inclusion rule (IIR) would, like Global Intangible Low-Tax Income (GILTI) and CFC rules, tax foreign earnings of companies under certain conditions. Second, a domestic top-up tax might apply. Finally, an undertaxed profits rule would, in some instances, deny cross-border deductible payments. All rules would be triggered by a minimum effective tax rate which would require countries to agree on a rate and a base for the minimum tax. These rules are typically referred to as“Pillar 2” of the OECD’s plan.

A UTPR would apply additional tax on a subsidiary of a multinational that has low-taxed profits outside the jurisdiction applying the UTPR.

The Difficulty of an Undertaxed Profits Rule

Calculating whether a company’s income is undertaxed relative to the minimum tax at the company level, country level, or global aggregate would be difficult and would rely on consistently and uniformly calculating effective rates of taxation across countries that have very different approaches to corporate taxation. The “top-up tax” is the difference between the effective tax rate in the jurisdictions the company operates in and the 15 percent rate.

The amount a jurisdiction could claim from the UTPR depends on its share of a company’s employees and assets in the jurisdiction. The calculation takes the jurisdiction’s share of a company’s employees times 50 percent plus the jurisdiction’s share of the company’s tangible assets times 50 percent. This gives the jurisdiction’s share of the UTPR top-up.