The compatibility of the Undertaxed Profits Rule (UTPR) of the Pillar Two Rules with Certain Principles of the International Tax Regime

Abstract

The Undertaxed Profits Rule (UTPR), one of the main rules of the Pillar Two framework, departs from traditional principles recognized in international tax law, under which the allocation of taxing rights to a jurisdiction depend on the existence of a sufficient nexus, such as residence or source. Against this background, the UTPR’s compatibility with certain principles of customary international law and with tax treaties has been debated. This article provides an overview of that debate, particularly as it concerns the UTPR’s potentially extraterritorial or discriminatory nature. It also discusses potential solutions to address some of these concerns and situates the UTPR within the broader context of the Canadian tax system.