What Is the Pillar 2 UTPR and How Is It Calculated?

The Undertaxed Profits Rule (UTPR) is part of an international tax reform effort led by the Organisation for Economic Co-operation and Development (OECD) to address tax challenges from the economy’s digitalization. The UTPR functions as a secondary measure, or backstop, within this new framework. It ensures that large multinational corporations pay a minimum level of tax on their income in every jurisdiction where they operate. The rule applies when other parts of the framework have not fully captured income that is taxed below the agreed-upon minimum rate.

The GloBE Rules Framework

The UTPR is part of the Global Anti-Base Erosion (GloBE) rules, under Pillar 2 of the OECD’s plan. The goal of the GloBE rules is to ensure that large multinational enterprises (MNEs) are subject to a minimum effective tax rate of 15% in each country of operation. These rules apply to MNE groups with annual consolidated revenues of €750 million or more. The framework identifies any entity included in the MNE’s consolidated financial statements as a “Constituent Entity.”

The GloBE rules use two primary mechanisms: the Income Inclusion Rule (IIR) and the UTPR. The IIR is the primary rule, which requires the Ultimate Parent Entity (UPE) of a multinational group to pay a “top-up tax” on its share of income from any subsidiary taxed below 15%. This calculation is performed on a jurisdictional basis, meaning the MNE must determine its effective tax rate for each country it operates in.

The UTPR serves as a backstop to the IIR, designed to capture any remaining top-up tax that was not collected under the IIR. The framework also allows for a Qualified Domestic Minimum Top-Up Tax (QDMTT). This lets a country collect the top-up tax on the profits of MNEs within its own borders first, with any such tax being credited against the GloBE liability.

Triggers for the UTPR

The Undertaxed Profits Rule is activated under specific circumstances where the Income Inclusion Rule has not achieved its objective. A primary trigger for the UTPR is when the Ultimate Parent Entity of a multinational group is located in a jurisdiction that has not implemented a qualified IIR. In this scenario, there is no mechanism at the parent level to collect the top-up tax on low-taxed profits from subsidiaries in other countries.

Another situation that activates the UTPR involves the UPE itself being a low-taxed entity. If the parent company’s own profits are taxed below the 15% minimum rate, and its home jurisdiction does not apply a domestic top-up tax, the IIR at the parent level would not address this shortfall. The responsibility for collecting the top-up tax on the UPE’s income then falls to other jurisdictions within the group that have implemented the UTPR.

Complex ownership structures can also lead to UTPR activation. For instance, in groups with significant minority ownership interests, an IIR applied by an intermediate parent company might not cover the entire share of low-taxed income attributable to those minority shareholders. The UTPR can be used to collect the remaining portion of the top-up tax.

Calculating and Allocating the UTPR Top-Up Tax

Calculating the UTPR liability begins with the total top-up tax required for the entire multinational group. This amount is the sum of all top-up taxes for each jurisdiction where the group’s effective tax rate is below 15%, to the extent the tax has not already been collected under an IIR. This calculation determines the additional tax needed to bring the total to the minimum rate.

Once the total uncollected top-up tax, known as the Total UTPR Amount, is established, it is allocated among the countries that have implemented the UTPR and in which the MNE has a presence. The allocation follows a specific formula based on two equally weighted factors: the MNE’s employees and its tangible assets. The formula uses the proportion of the group’s total employees and the net book value of its total tangible assets located in each UTPR jurisdiction to determine that country’s share of the tax.

For example, an MNE has a Total UTPR Amount of $10 million and operates in two UTPR countries, Country A and Country B. Country A is home to 70% of the group’s employees and 60% of its tangible assets, while Country B has 30% of the employees and 40% of the assets. The allocation key for Country A would be (50% 70%) + (50% 60%), which equals 65%. Country B’s key would be (50% 30%) + (50% 40%), or 35%. Country A would be allocated the right to collect $6.5 million of the UTPR tax, and Country B would collect the remaining $3.5 million.

UTPR Implementation and Compliance

The implementation of the UTPR is being phased in, generally one year after the other Pillar 2 rules. While the IIR and QDMTT became effective in many countries in 2024, the UTPR is scheduled to apply for fiscal years beginning on or after January 1, 2025, in most jurisdictions that have adopted the full framework.

After a jurisdiction determines its allocated share of the UTPR top-up tax, it must have a mechanism to collect it. The OECD Model Rules provide a primary method for this collection: denying corporate income tax deductions for payments made to other group entities. For example, a subsidiary in a UTPR jurisdiction might be denied a deduction for an interest or royalty payment made to a group member in a low-tax country, increasing the subsidiary’s taxable income.

The framework also allows for an alternative collection method, described as an “equivalent adjustment.” This could take the form of a direct charge or a separate levy that is imposed on the local constituent entities to meet the UTPR obligation. The chosen method must result in an additional cash tax expense for the MNE in the year the UTPR is applied.

Compliance and reporting for the GloBE rules are managed through a standardized document called the GloBE Information Return (GIR). The GIR requires the MNE to detail its calculations for the effective tax rate and any top-up tax liability for every jurisdiction in which it operates. This provides tax administrations with the necessary information to assess the MNE’s Pillar 2 liabilities, including any tax due under the UTPR.