Federal Tax Day - Current, M.1, OECD Releases Pillar Two Side-by-Side Guidance, (Jan 8, 2026)

On January 5, 2026, the OECD /G20 Inclusive Framework issued the Global Anti-Base Erosion Model Rules (Pillar Two), Side-by-Side Package, an 88-page guidance package on the Pillar Two Global Minimum Tax framework. The Side-by-Side package contains:

• side-by-side and ultimate parent entity (UPE) safe harbors,

• a simplified effective tax rate (ETR) safe harbor, and

• an extension of the transitional CbCR safe harbor and a new substance-based tax incentive safe harbor.

Background

Base Erosion and Profit Shifting (BEPS) Pillar Two culminated in the Global anti-Base Erosion (GloBE) model rules, designed to ensure large multinational enterprises (MNEs) pay a minimum ETR of 15% on the income arising in each jurisdiction where they operate. Where the ETR is below 15%, the GloBE rules call for a top-up tax through the Income Inclusion Rule (IIR), Undertaxed Payments Rule (UTPR), and the Qualified Domestic Minimum Top-up Tax (QDMTT). Over 50 countries have implemented the GloBE rules in their domestic legislation.

In January 2025, President Trump issued a memorandum stating that the OECD two-pillar solution has no force or effect in the United States without Congressional action. A companion memo made clear that the President considers the IIR, UTPR, and QDMTT unfair and discriminatory taxes as applied to U.S. multinationals. In May 2025, the House passed Code Sec. 899 as part of the One Big Beautiful Bill, imposing increased taxes on U.S.-source income of persons resident in jurisdictions that impose unfair foreign taxes.

In June 2025, the OECD G7 proposed a “side-by-side” arrangement whereby U.S. tax rules would stand alongside the Pillar Two rules, and U.S.-parented groups would be excluded from the IIR and the UTPR. After the G7 negotiations, the United States removed Code Sec. 899 from the U.S. tax bill that Trump ultimately signed into law in July 2025.

The G7 side-by-side proposal needed the agreement of the OECD/G20 Inclusive Framework on BEPS—a group of 147 taxing jurisdictions. The Side-by-Side package reflects the challenge faced by these disparate countries to find common ground on global minimum tax standards.

Side-by-Side and UPE Safe Harbors

Side-by-side safe harbor. The side-by-side safe harbor provides that the Inclusive Framework jurisdictions may not apply the IIR and UTPR to an electing MNE group with its ultimate parent entity (UPE) located in a jurisdiction with a qualified side-by-side regime that:

• has an eligible domestic tax system,

• has an eligible worldwide tax system, and

• provides a foreign tax credit for QDMTTs on the same terms as any other creditable tax.

An eligible domestic tax system is one with:

• an adjusted corporate income tax rate of at least 20%,

• an adjusted QDMTT or corporate alternative minimum tax of at least 15% that applies to a substantial portion of the aggregate income of in-scope MNEs,

• no material risk that in-scope MNEs pay less than a 15% ETR on overall profits of domestic operations.

An eligible worldwide tax system is one with:

• a comprehensive tax regime for all resident corporations with a broad base and limited income exclusions,

• substantial mechanisms to address BEPS risks, and

• no material risk that in-scope MNEs pay less than 15% ETR on overall profits of foreign operations.

The United States currently is the only jurisdiction with a qualified side-by-side regime.

The side-by-side safe harbor broadly exempts from IIR and UTPR all entities of a U.S.-parented MNE, including domestic and foreign subsidiaries and branches, and any of the group’s interests in a joint venture, regardless of size.

U.S. MNEs must elect the side-by-side safe harbor, and electing groups still must file a GloBE Information Return.

UPE safe harbor. The UPE safe harbor protects the domestic profits of MNE groups headquartered in jurisdictions with an eligible domestic tax regime enacted and in effect on January 1, 2026, but not an eligible worldwide tax regime. An MNE group that elects the UPE safe harbor is not subject to the UTPR in the UPE jurisdiction.

Next steps. All MNE groups, even those electing either safe harbor, remain subject to the QDMTT in all QDMTT jurisdictions where they operate.

U.S. MNEs received no Pillar Two relief for 2024 and 2025. In-scope companies still must file full GloBE Information Returns for 2024 and 2025 and must file these returns going forward to meet their QDMTT filing obligations.

The Inclusive Framework will monitor taxpayer and tax jurisdiction behaviors under the side-by-side system through 2029 to address emerging BEPS or competition risks.

Substance-Based Tax Incentives Safe Harbor

The Side-by-Side package expands the types of tax incentives that are protected from having their value diluted in the ETR calculation. Expenditure-based and production-based incentives tied to substance (payroll or tangible assets) are protected, with caps, through how they are used in the ETR calculation.

MNE groups can make the substance-based tax incentives safe harbor election for tax years beginning on or after January 1, 2026.

Transitional CbCR Safe Harbor and Simplified ETR Safe Harbor

Two safe harbors allow taxpayers to simplify their ETR calculations and avoid full GloBE rule calculations. First, the existing transitional CbCR safe harbor is extended another year, to tax years beginning on or before December 31, 2027, and ending on or before June 30, 2029. The simplified ETR rate for tax years covered by the extension remains 17%, the same as for 2026.

Under the new simplified ETR safe harbor, MNE groups may calculate their simplified ETR for each operating jurisdiction (rather than per-entity). Where the simplified ETR exceeds 15%, the MNE is deemed to have no top-up tax liability for that jurisdiction. The simplified ETR safe harbor applies in tax years beginning on or after December 31, 2026, but countries may implement it for tax years beginning on or after December 31, 2025.

For the text of the Global Anti-Base Erosion Model Rules (Pillar Two), Side-by-Side Package, click here.

By Elizabeth Yablonicky, J.D. – Senior Content Management Analyst