Defending the UTPR: Creative Corporate Structuring Can’t Hide Real Connections

TAX NOTES INTERNATIONAL, VOLUME 108, NOVEMBER 28, 2022

Posted: 6 Dec 2022

See all articles by Jeffery M. Kadet

Jeffery M. Kadet

University of Washington - School of Law

Date Written: November 28, 2022

Abstract

Several commentators have expressed the belief that the Pillar Two UTPR (undertaxed profits rule) is on shaky ground legally since it allows one country to tax a local constituent entity (a local subsidiary or taxable branch) on income recorded by group members in other countries that have no direct connection with the local constituent entity. The commentators say that without some economic connection recognized under typical tax rules, the country should not be able to apply the UTPR. For example, one commentator states:

“It seems impossible to conclude that a state has jurisdiction to impose tax on one of its nationals simply because low-taxed income has been earned by uncontrolled persons [i.e. other group members] who are not its nationals and are simply pursuing their own business wholly outside the state. Taxation based on that income is not related to the status of persons, or interest in things, within the state’s territory, nor to activities, interests, status, or relations of nationals either in or outside the territory.”

This letter to the Editor of Tax Notes International explains how there is an economic connection that provides the link that these commentators seek that justifies the application of the UTPR. In short, the letter explains that profits shifted into group members in tax havens and other low-tax jurisdictions will have been shifted out of operating group members in the countries in which the group conducts actual operations. Given the pervasiveness of profit shifting and the unbelievable quantum of aggregate shifted profits, there clearly is an economic connection that justifies the application within Pillar Two of the simple and easy to apply UTPR mechanism.

Keywords: UTPR, BEPS, Pillar Two, Pillar 2, Undertaxed Profits Rule

JEL Classification: H21, H25, K34, E62

Suggested Citation

Kadet, Jeffery M., Defending the UTPR: Creative Corporate Structuring Can’t Hide Real Connections (November 28, 2022). TAX NOTES INTERNATIONAL, VOLUME 108, NOVEMBER 28, 2022, Available at SSRN: https://ssrn.com/abstract=4285163

Jeffery M. Kadet (Contact Author)

University of Washington - School of Law ( email )

William H. Gates Hall
Box 353020
Seattle, WA 98105-3020
United States

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