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On 5 January 2026, the OECD announced that 147 members of the Inclusive Framework on BEPS have agreed to new administrative guidance for the Pillar Two global minimum tax rules.
The ‘Side-by-Side Package’ includes a permanent simplified ETR safe harbour, extensions for CbCR and substance-based tax incentive safe harbours, along with plans for future reviews.
The Side-by-Side Package’s key feature, the Side-by-Side safe harbour, allows eligible MNEs in qualifying countries apply a zero top-up tax under the IIR or UTPR for all operations if certain conditions are met. The SbS safe harbour starts with fiscal years from 1 January 2026, and as of 5 January 2026, only the United States meets the OECD eligibility criteria. Further details of all updates reflected in the Side-by-Side Package have been set out below.
Summary of Pillar Two developments
Side by Side (SbS) Safe Harbour
Following the G7’s announcement last year regarding the application of the pillar two rules to MNC Groups with a US Ultimate Parent Entity (UPE), and following the US removal of the proposed Section 899 retaliatory measure, a new ‘side-by-side’ safe harbour has been introduced, which will apply from 1 January 2026. Jurisdictions eligible for the SbS safe harbour must have both an ‘eligible domestic tax system' and an 'eligible worldwide tax system’, provide a foreign tax credit for QDMTTs, and meet specified timing requirements.
If a group elects into this safe harbour, it will not be subject to the income inclusion rule (IIR) or undertaxed profits rule (UTPR) but will still be subject to domestic minimum taxes. It is confirmed that the US will be a qualified side-by-side jurisdiction. While other jurisdictions may seek to demonstrate they too qualify for both the eligible domestic and worldwide tax systems, the reality is that only the US has qualified initially, and further qualifications may be contentious.
UPE Safe Harbour
A UPE safe harbour will also be introduced from 1 January 2026 for groups headquartered in a jurisdiction that has a pre-existing domestic tax regime that achieves a minimum level of taxation of the group’s domestic operations. If a group elects into this safe harbour, it will not be subject to the UTPR in respect of the profits located in the UPE jurisdiction, although it will still be subject to the IIR and domestic minimum taxes in relevant overseas jurisdictions. Similar to the SbS Safe Harbour, presently only the US would be expected to meet the conditions required for a ’Qualified UPE Regime’.
Simplified ETR Safe Harbour
The Inclusive Frameworks primary simplification is the introduction of a permanent simplified ETR safe harbour. If a tested jurisdiction qualifies for the simplified ETR safe harbour, the top-up tax for such jurisdiction is deemed zero for a fiscal year.
To qualify, a jurisdiction must either (1) have a 'simplified ETR' at or above the minimum rate (i.e. 15%), or (2) have a 'simplified loss'. The computation of both the simplified ETR and simplified loss requires significant data gathering and required adjustments, including special rules for M&A transactions, transfer pricing adjustments, cross-border tax allocations, etc. It is applicable for fiscal years from the beginning of 2027, or the beginning of 2026 in specified circumstances.
Extension of the transitional CbCR Safe Harbour
The transitional country-by-country reporting (CbCR) safe harbour will be extended for one year so that it applies to periods beginning on or before 31 December 2027 but excluding periods ending after 30 June 2029.
Substance-based tax incentives Safe Harbour - Under this safe harbour, certain qualifying tax incentives (QTIs) can be added to covered taxes (or simplified covered taxes if SESH is utilised), effectively treating them as if additional tax had been paid, reducing or eliminating any top-up tax that would otherwise arise solely due to the incentive lowering the local tax. The guidance allows an election to include qualified refundable tax credits and marketable transferable tax credits, which are otherwise treated as income items for minimum tax purposes, as QTIs.
Should you require any support with the application of the side-by-side package, or any other Pillar Two compliance obligations, please contact the RSM Pillar Two team, or your RSM contact.
