Tax Insights: Finance releases draft legislation to implement the undertaxed profits rule

August 22, 2024

Issue 2024-25

In brief

On August 12, 2024, the Department of Finance released draft legislation to amend the Global Minimum Tax Act (GMTA). The draft legislation includes:

adding the Undertaxed Profits Rule (UTPR),¹ which is a residual rule for collecting top-up tax that is not otherwise collected under other rules in the GMTA
making minor technical amendments to address certain concepts introduced by the Organisation for Economic Co‑operation and Development (OECD) in its June 2024 administrative guidance²

The UTPR will generally apply to in-scope multinational groups for fiscal years that begin after December 30, 2024. An exception to the UTPR is available for any top‑up tax in respect of a jurisdiction of the ultimate parent entity (UPE) when the transitional UTPR safe harbour applies.

In detail

Undertaxed Profits Rule

The UTPR is a key component of the “Pillar Two” global minimum tax regime developed by the OECD. The UTPR acts as a backstop rule that applies to collect top‑up tax that has not been collected under the Income Inclusion Rule (IIR) or Qualified Domestic Minimum Top-up Tax (QDMTT).³

The UTPR allocates a portion of the uncollected top-up tax for the multinational group to Canada based on an allocation key that compares the employees and tangible assets for group entities located in Canada to the employees and tangible assets for all group entities in jurisdictions that have implemented a UTPR. This can result in an allocation of top-up tax to Canada in respect of operations of parent or sister entities of the Canadian group.

Any top-up tax that is allocated to Canada is subsequently allocated to each respective Canadian entity within the group based on their share of the employees and tangible assets in Canada.

Transitional UTPR safe harbour

The draft legislation includes a transitional UTPR safe harbour that applies to deem any top-up tax in respect of the UPE’s jurisdiction for a fiscal year to be nil in situations when:

the filing constituent entity of the multinational group elects to apply the transitional UTPR safe harbour
the corporate tax rate applicable to the UPE jurisdiction is at least 20%
the fiscal year begins before January 1, 2026, and ends before December 31, 2026, and
the fiscal year is not longer than 12 months

The takeaway

The introduction of the UTPR may affect multinational groups with Canadian subsidiaries when the UPE’s jurisdiction has not enacted Pillar Two rules. These in-scope groups should consider if any top-up tax will be subject to the UTPR and whether they qualify for the transitional UTPR safe harbour. Where this safe harbour applies, it prevents top-up tax from being payable for the group’s operations in the UPE jurisdiction. However, if the group also operates in other jurisdictions that have not enacted Pillar Two rules, the safe harbour would not apply to those jurisdictions.

The UTPR should not affect Canadian headquartered multinational groups because these groups are already subject to the Pillar Two rules that were enacted in June 2024, effective for fiscal years that begin after December 30, 2023.

^{1. The UTPR is in new Part 2.1 of the GMTA.

2. For more information, see our Tax Policy Alert “OECD releases guidance relating to Pillar Two GloBE and Pillar One Amount B.”

3. For more information on the IIR and QDMTT, see our Tax Insights “Canada releases Global Minimum Tax Act” (June 21, 2024 update).}