From the Super Mario Wiki
Cutout, as seen on the Gamepad.

Cutout is a technique used by Huey in Paper Mario: Color Splash. Cutout is first used in Cherry Lake. The player has to press Y Button to use Cutout. If something lines up with a bright dotted line that appears when Cutout is used, it will be in effect. The screen shifts to the Wii U Gamepad. The stylus is used to trace the dotted line shown. The line will turn rainbow and will be cut out, hence the name, then one of six circumstances will happen:

  1. Mario and Huey use the cut out area as a platformer and get to the flag. They'll be transported to where the flag would be in real space.
  2. Cards will appear close to where the cut-out spot would be.
  3. The player would have to place a Thing Card in the cut out area. The required card depends on the location. Replicas will not work.
  4. Luigi will appear and give Mario 300 coins.
  5. The object in the cut out area disappears.
  6. In the Green Energy Plant, cutting out the monitor screen will make Mario and Huey go into the monitor, into a world similar to Super Mario Bros. 3. Pressing Y Button here will use the Flip technique instead, similar to Super Paper Mario.

One of the Super Flags in Port Prisma is unrolled after Mario performs all Cutouts. When Mario gives the "Deep Cuts" Toad in Port Prisma 50 coins, he will hint to Mario an area where he can use the Cutout technique.