Good Intentions, Bad Tools: A Case for Repealing the UTPR

Abstract

“The undertaxed profits rule (UTPR) — a cornerstone back-stop to the OECD/G20 Pillar Two minimum-tax framework — has become a flashpoint in international tax. It authorises jurisdictions to levy ‘top-up’ taxes on an MNE’s local affiliate whenever some other jurisdiction taxes that group below the 15 percent floor. This article argues that the UTPR is a legally dubious and economically inefficient experiment in extraterritorial taxation. First, it conflicts with treaty non-discrimination clauses and customary nexus principles, risking unrelieved double taxation. Second, it distorts investment incentives, undermines sovereign tax-credit regimes, and imposes heavy compliance costs while delivering little net revenue. Third, early implementation is already provoking retaliatory legislation (for example, proposed U.S. § 899) and threatening a tax-trade war. We conclude that repealing the UTPR — while retaining the income-inclusion rule and qualified domestic minimum taxes — would restore legal certainty, preserve consensus-based multilateralism, and achieve Pillar Two’s policy goals without an extraterritorial ‘stick’.

JEL Classification: H26, F23, K34, H25