OECD releases Pillar Two Side-by-Side package: Key tax takeaways for businesses

The Organisation for Economic Co-operation and Development (OECD) recently released its highly anticipated Side-by-Side (SbS) package, marking a significant step in alleviating the application of the global minimum tax rules for multinational enterprises (MNEs) headquartered in the United States.

This guidance introduces new safe harbors, simplifies compliance, and provides clarity for MNEs navigating Pillar Two requirements.

In light of these changes, which bring both opportunities and new obligations, businesses are encouraged to assess how the SbS package will affect their tax strategies. We provide key takeaways below.

SbS package considerations for MNEs

1. US-parented MNEs

• The US is currently the only qualified SbS regime, exempting US MNEs from the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR) in all jurisdictions in which they operate.
  
  
• US MNEs are still required to file a Global Anti-Base Erosion (GloBE) Information Return (GIR). However, the filing requirement is mostly limited to the data necessary for purposes of local Qualified Domestic Minimum Top-up Taxes (QDMTTs).
  
  
• QDMTTs will continue to apply without US Global Intangible Low-Taxed Income (GILTI) push-down.
  
  
• The SbS Safe Harbor should be applicable as of January 1, 2026 – but in case jurisdictions are unable to enact the rules retroactively, there is a risk that US MNEs will be subject to (reduced) UTPR (calculated in line with a substance-based allocation key for each respective jurisdiction) on the earnings of low-taxed subsidiaries.
  
  
• US MNEs will be subject to the regular GloBE rules for 2024 and 2025 and will need to file GIR returns for both years.

2. Non-US parented MNEs

• US subsidiaries of non-US MNEs are not exempt from the application of the GloBE rules; in such a case, both GILTI and IIR apply in principle, resulting in the potential for double taxation.
  
  
• US subsidiaries of non-US MNEs can be low-taxed resulting in IIR or UTPR top-up taxes on US profits.

3. US parented and non-US-parented MNEs

• For purposes of the GIR or local QDMTTs, all MNEs are encouraged to assess if they can avail themselves of tax incentives that may qualify as Qualified Tax Incentives (QTIs), and how these incentives may impact their Pillar Two position.
  
  
• Companies that currently avail themselves of tax incentives that qualify as Qualified Refundable Tax Credits (QRTCs) or Marketable Transferable Tax Credits (MTTCs) are encouraged to assess if their position can be optimized by electing for all or partial QTI treatment of these incentives.

SbS package safe harbors: Key details

The SbS package includes the following safe harbors:

• A permanent Simplified Effective Tax Rate (ETR) Safe Harbor
• A one-year extension of the Transitional Country-by-Country Reporting (CbCR) Safe Harbor
• A Substance-based Tax Incentive (SBTI) Safe Harbor
• An SbS Safe Harbor
• An Ultimate Parent Entity (UPE) Safe Harbor

Importantly, the OECD also committed to conducting future stock takes of the SbS package. We provide more details below.

1. Permanent Simplified ETR Safe Harbor

The Simplified ETR Safe Harbor is designed to ease compliance under Pillar Two by allowing MNEs to avoid top-up tax in jurisdictions where their Simplified ETR is at least 15 percent. Instead of complex GloBE calculations, this approach relies on financial statement data, making it a practical solution for many businesses.

If a jurisdiction meets the 15-percent threshold, no top-up tax applies. It is generally effective for financial years commencing on or after December 31, 2026. However, it may be applied earlier (i.e., financial years commencing on or after December 31, 2025) in certain cases, such as where the QDMTT Safe Harbor had been used or only one jurisdiction had GloBE taxing rights.

To apply the Simplified ETR Safe Harbor, the Simplified Income of the MNE is determined by adjusting the financial accounting income reported on a consolidated financial statement. Adjustments are made to exclude dividends and equity gains and losses and by applying industry and mergers-and-acquisitions adjustments. Simplified Taxes, which include income tax expenses and deferred taxes (except those under GloBE recapture rules), are also determined for this purpose. Calculations may be made on a jurisdictional basis, allowing aggregation across entities within that jurisdiction. In QDMTT jurisdictions using local Generally Accepted Accounting Principles (GAAP), the accounts prepared in line with local accounting standards can be used.

Once these figures are available, the Simplified ETR can be calculated by using this formula:

If the result is 15 percent or higher, the jurisdiction qualifies for the safe harbor, and the top-up tax is deemed to be zero. Optional five-year elections will allow businesses to exclude foreign exchange gains and losses, adjust pension expenses, and decide – on an annual basis – whether to include taxes pushed down to controlled foreign corporations (CFCs) or hybrids.

This safe harbor may streamline compliance by using existing financial data, but it remains complex due to election options and jurisdiction-specific GAAP requirements. The guidance confirms that, in case an MNE has a low ETR in a jurisdiction in a particular year and cannot qualify for the safe harbor, such MNE is allowed to re-access the safe harbor – ensuring that the safe harbor provides enduring simplification for MNEs, on which further guidance is expected from the OECD and IF. Therefore, the "once out, always out" rule that applies for the Transitional CbCR Safe Harbor does not apply to the Simplified ETR Safe Harbor.

Furthermore, alignment of internal systems to capture required data is an important task for businesses, in line with the OECD's review of the safe harbor rules in 2029.

2. Extension of Transitional CbCR Safe Harbor

To give companies time to transition from the Transitional CbCR Safe Harbor to the permanent Simplified ETR Safe Harbor, the OECD has extended the application of the Transitional CbCR Safe Harbor by one year, until the end of 2027. As a result, companies may have the option between continuing to apply the Transitional CbCR Safe Harbor and adopting the Simplified ETR Safe Harbor. Compliance with the Transitional CbCR Safe Harbor is likely the simplest path for most companies, albeit that the safe harbor rate of the Transitional CbCR Safe Harbor for 2026 and 2027 is set at 17 percent, versus a 15-percent rate for the Simplified ETR Safe Harbor.

3. SBTI Safe Harbor

Tax incentives typically reduce the amount of Covered Taxes in a jurisdiction and therefore reduce the GloBE ETR, potentially resulting in top-up taxes. Under the existing Pillar Two rules, so-called QRTCs and MTTCs have more favorable Pillar Two treatment, allowing the tax benefit to be considered income (increasing the denominator in the ETR calculation) without reducing Covered Taxes (the numerator in the ETR calculation). The narrow scope of QRTCs and MTTCs has drawn scrutiny from several jurisdictions, including the US, which has found that several of its tax incentives (e.g., research and development tax credits) would not be considered qualifying refundable tax incentives, resulting in a competitive disadvantage.

Instead of revising the scope of QRTCs and MTTCs, the new OECD guidance introduces a new category of tax incentives – the QTI – which benefit from treatment akin to the treatment of QRTCs and MTTCs, albeit with some important differences. At the election of the MNE, the SBTI Safe Harbor eliminates a top-up tax that otherwise would be attributable to a QTI. Although labeled as a safe harbor, this rule functions to determine the treatment of QTIs for purposes of the GloBE rules.

A QTI is a generally available tax incentive that is either (1) expenditure-based (e.g., tax credits and super-deductions) or (2) production-based (e.g., volume of production). Application of the SBTI Safe Harbor to QTIs allows a company to increase its Covered Taxes (the numerator in the GloBE ETR calculation). The amount of the QTI is capped at either 5.5 percent of eligible payroll expenses or 5.5 percent of depreciation of eligible tangible assets. Alternatively, a company may elect, for a period of five years, to apply a cap equal to one percent of the carrying value of eligible tangible assets.

In the absence of a cap, the treatment of QTIs may be more favorable than the treatment of QRTCs and MTTCs, because a QTI would effectively not reduce Covered Taxes while also not increasing GloBE income for purposes of the GloBE ETR calculation. Therefore, the guidance provides the option for a company to elect to treat a QRTC or MTTC that also qualifies as a QTI, allowing a reduction of GloBE income up to the election amount and a reduction in Covered Taxes (the latter is neutralized by the ability to also increase Covered Taxes under the QTI treatment). It is expected that companies would consider QTI treatment of QRTCs and MTTCs only up to the cap, and would continue regular QRTC/MTTC treatment for any remaining QRTCs or MTTCs.

Overall, the introduction of the QTI broadens the scope of substance-based tax incentives that may qualify for beneficial Pillar Two treatment, reducing potential GloBE ETR impact and top-up tax risk. QTI treatment may be more beneficial than the current treatment of QRTCs and MTTCs, so it will be important for companies to assess all tax incentives they are using (both QRTCs/MTTCs and other tax incentives) to determine whether they may qualify as QTIs.

A very important variable is the cap: It remains to be seen how impactful the cap is, and we cannot rule out that, in certain situations, the treatment of QRTCs and MTTCs may continue to be much more favorable compared to QTIs that are subject to the cap. Benefits are more likely to accrue in jurisdictions with higher payroll costs and more significant manufacturing activity, limiting the cap’s relevance for some countries.

4. SbS Safe Harbor and tax system

The SbS package comprises a set of two elective safe harbors that reduce Pillar Two compliance for MNEs headquartered in jurisdictions with minimum‑tax regimes aligned to the GloBE rules. The new safe harbors are the SbS Safe Harbor and the UPE Safe Harbor. They operate alongside, and do not replace, QDMTTs or the Pillar Two rules.

Under the SbS Safe Harbor, an MNE whose UPE is in a jurisdiction listed as having a Qualified SbS Regime may elect to set its top‑up tax to zero for IIR and UTPR in every jurisdiction where it operates. This also covers the top-up tax attributable to interests in joint ventures and joint venture subsidiaries.

A jurisdiction is considered a Qualified SbS Regime if it has an eligible domestic tax system and an eligible worldwide tax system.

The domestic tax system must include:

• At least a 20-percent statutory corporate income tax rate (after adjusting for preferential regimes and including subnational corporate income tax where relevant)
  
  
• A foreign tax credit for QDMTTs treated like any other creditable Covered Tax
  
  
• A QDMTT or a financial‑statement‑based corporate alternative minimum tax at a nominal rate of at least 15 percent that applies to a substantial share of in‑scope domestic income, and
  
  
• Provided comfort that, in aggregate and over time, in‑scope UPE‑headquartered groups will not face an effective rate below 15 percent on domestic profits.

The worldwide tax system must:

• Comprehensively tax the foreign income of residents, including active and passive income of branches and CFCs – whether distributed or not – with only limited exclusions consistent with minimum‑tax policy (i.e., income typically taxed at high source‑country rates)
  
  
• Include strong unilateral base erosion and profit shifting (BEPS) safeguards, and
  
  
• Provide comfort that, in aggregate and over time, in‑scope groups will not face effective rates below 15 percent on foreign profits, with incentives assessed consistently with GloBE treatment.

When the SbS Safe Harbor election applies, top‑up tax is zero for IIR and UTPR for all constituent entities – including stateless and minority‑owned entities – and any IIR that would otherwise arise at intermediate or partially owned parent levels is also zero. The election does not affect QDMTTs; they continue to be calculated without pushing down CFC or branch taxes and remain creditable under both the GloBE rules and Qualified SbS Regimes.

Key administration-related items include:

• A central list of Qualified SbS Regimes
  
  
• An effective date generally for fiscal years beginning on or after January 1, 2026
  
  
• GIR reporting that reflects the election (only Section 1 is required to IIR/UTPR jurisdictions, with continued jurisdiction‑level reporting for QDMTTs)
  
  
• A requirement to notify within three months of any material changes that could affect the original determination (for example, a rate cut or removal of key anti‑BEPS tools)

It is important to bear in mind that multinational businesses will still need to prepare detailed GloBE filings for jurisdictions that have already enacted the GloBE rules in 2024 and 2025.

The UPE Safe Harbor applies where a jurisdiction meets the domestic, but not the worldwide, eligibility standard. If the UPE is in a jurisdiction with a Qualified UPE Regime (i.e., an eligible domestic system in effect by January 1, 2026), the group may elect to set the top‑up tax for the UPE jurisdiction to zero for UTPR purposes only. This does not affect IIR or UTPR outside the UPE jurisdiction.

The Inclusive Framework will review requests to recognize Qualified SbS or UPE Regimes – first by mid‑2026 for existing regimes, and then in 2027–2028 upon request. The schedule reflects when laws take effect and the capacity to review them, with a stated preference to keep the coordinated GloBE rules as the primary system.

All MNEs, including those electing SbS or UPE Safe Harbors, remain fully subject to QDMTTs wherever they apply. QDMTTs must be calculated without pushing down owner‑level or branch taxes and are credited on the same basis as other Covered Taxes. Conditional or discriminatory taxes are not recognized as Covered Taxes. Ongoing peer review, monitoring, and targeted responses will address any level‑playing‑field risks identified in periodic stock takes.

For more information, please contact the authors.