Undertaxed Profits Rule (UTPR)

The undertaxed profits rule (UTPR) is one of the enforcement mechanisms of the Organisation for Economic Co-operation and Development’s (OECD) global tax deal. The UTPR and the income inclusion rule (IIR) are tools the Pillar Two framework provides countries to combat base erosion and profit shifting by multinationals. It allows a country to tax a corporation’s domestic subsidiary beyond what it would normally owe, if a subsidiary in another jurisdiction fails to meet the OECD’s 15 percent global minimum tax.

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How Would an Undertaxed Profits Rule Work?

The 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 of interconnected rules, collectively known as Pillar Two. These rules are designed to apply to multinational companies with total global revenues over a certain threshold.

First, an IIR would, like global intangible low-taxed income (GILTI) and controlled foreign corporation (CFC) rules, tax foreign earnings of companies under certain conditions. Second, a qualified domestic minimum top-up tax (QDMTT) would increase the domestic tax on the excess profits of domestic firms. Finally, a UTPR 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.

A UTPR would apply additional tax on a subsidiary of a multinational that has low-taxed profits in another jurisdiction. In other words, the UTPR is an extraterritorial enforcement mechanism for a tax agreement some countries have not adopted. It effectively permits jurisdictions to tax economic activity occurring entirely outside their borders by using a corporation’s domestic presence as collateral. This extraterritoriality makes Pillar Two particularly controversial and may incentivize countries to adopt compliant tax policies.

The United States, the largest victim of profit-shifting, has largely been in favor of the OECD’s anti profit-shifting efforts, though it strongly opposes the UTPR. However, in June of 2025, the Treasury Department announced a deal with the G7 that would exempt American firms from Pillar Two taxes in exchange for removal of Section 899 from the One Big Beautiful Bill Act. This arrangement will preserve American corporations’ tax sovereignty under their domestic system.

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; it 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.

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