Explaining UTPR and the Pillar II Framework

The OECD Pillar II proposal, also known as the Global Minimum Tax, is part of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The BEPS initiative aims to address tax challenges arising from digitalization and globalization of the economy.

Specifically, Pillar II intends to ensure that multinational enterprises (MNEs) with total revenues exceeding 750 million Euros pay a minimum level of tax, regardless of where they are headquartered or the nature of their businesses. It is designed to alleviate concerns about potential profit shifting to low or no-tax jurisdictions, sometimes referred to as tax “base erosion.”

Elements of Pillar II

Three critical components of Pillar II are the Qualified Domestic Minimum Top-Up Tax (QDMTT), the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR):

  • A QDMTT is a minimum tax imposed by a country in accordance with the Pillar Two rules. If the Effective Tax Rate (ETR) of a company subject to Pillar II falls below the 15% global minimum rate, the QDMTT would kick in to tax the shortfall under 15% (the “top-up tax”) in such country.
  • The secondary rule is the IIR. If the income of any company’s subsidiaries in other countries is not taxed at least 15 percent, the parent’s country would collect the difference.
  • The UTPR is intended to serve as a backstop to ensure the top-up tax is paid where a company’s tax below the 15% ETR is not collected under an IIR. Generally, this rule works by requiring an adjustment (such as a denial of a deduction) that increases the tax liability for a subsidiary operating in the jurisdiction of the country imposing the UTPR.

A Timeline of Pillar Two Implementation

History of Pillar II

The Pillar II proposal was first initiated as part of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), launched in 2015. The concept of a global minimum tax, which is at the heart of Pillar II, gained prominence over the following years.

In January 2019, as part of its work on the tax challenges arising from digitalization, the OECD released a policy note which, for the first time, made explicit reference to the exploration of a global anti-base erosion proposal (now known as “Pillar II”).

This was followed by a public consultation document in February 2019 and a program of work adopted in May 2019. The OECD then released a detailed “Blueprint” of the Pillar II proposal in October 2020.

A year later, in October 2021, more than 135 countries, including the United States under President Biden’s direction, agreed to implement the Pillar II framework. That agreement is sometimes referred to as the Inclusive Framework (IF), which was published in December 2021.

In December 2022, the OECD published three guidance papers focused on directing Pillar II implementation. It released the “Administrative Guidance for Implementation of the Global Minimum Tax” earlier this year.

While the framework has been adopted, each member of the OECD must incorporate the Pillar II principles into its own domestic law. You can see where individual OECD members are in the process of Pillar II implementation by utilizing this resource from PwC.

Interplay with TCJA

The Tax Cuts and Jobs Act (TCJA), enacted by the United States in December 2017, made several significant changes to the U.S. international tax system that interact with the principles underlying the OECD’s Pillar II proposal.

One of the most notable provisions of the TCJA is the introduction of a Global Intangible Low-Taxed Income (GILTI) regime. This effectively imposes a minimum tax on the income of foreign subsidiaries of U.S. companies, which mirrors the principle of a global minimum tax proposed in Pillar II. The GILTI regime is designed to reduce the incentive for U.S. companies to shift their profits to low-tax jurisdictions.

Because there are differences in the design and operation of GILTI and the IIR rules under Pillar II, GILTI is not considered a qualified IIR for Pillar II purposes. For instance, GILTI is calculated on a global basis, taking into account the income of all foreign subsidiaries, while the IIR is proposed to apply on a country-by-country basis.

Congressional Republican Objections

On May 25, 2023, Ways and Means Committee Chairman Jason Smith (MO-08), along with every Committee Republican, introduced the Defending American Jobs and Investment Act (H.R. 3665), which they say is designed “to prevent President Biden’s global tax surrender from killing American jobs, surrendering sovereignty over our tax code, and handing a competitive advantage to the Chinese Communist Party.” If enacted into law, the bill would impose a punitive and discriminatory tax on international companies operating in the United States that happen to be globally headquartered in any country that imposes a UTPR or similar tax regime as part of its Pillar II implementation.

While GBA understands the perspective of Chairman Smith and his colleagues, imposing discriminatory taxes on international companies that have made a deliberate decision to invest and create millions of high-quality U.S. jobs is misguided. International companies grow America’s economy and make it more resilient through activities such as supporting local supply chains and small businesses, fueling American innovation, developing workforce training programs, exporting American-made goods and committing to charitable and sustainable developments.

Nationally, 7.9 million U.S. workers are employed by international companies. Over the past five years, international companies have created more than a quarter-million new manufacturing jobs in the United States, compared to overall U.S. manufacturing jobs, which remained flat during the same time. U.S. workers of international companies produce 23 percent of U.S. exports, shipping $412 billion in goods to customers around the world. And over the past five years of U.S. government data, employment at international firms in the United States has increased by 11 percent while private-sector job growth has only increased by two percent. For every U.S. job at an international company, three more are supported in the U.S. economy.