OECD: Agreement reached on Pillar Two side-by-side package

 This new safe harbour will ‘turn-off’ the application of the IIR and UTPR rules where the ultimate parent of an MNE Group is located in a jurisdiction that has a tax system that qualifies for side-by-side treatment. This exemption applies to the entire group – the parent and all its subsidiaries. A jurisdiction will qualify for this safe harbour where it meets certain conditions, primarily that it:

• applies a domestic nominal statutory corporate tax rate of at least 20% after taking account of preferential adjustments and sub-national corporate tax rates,
• imposes minimum taxation requirements with respect to both domestic and foreign income of local MNE Groups headquartered in the jurisdiction,
• provides tax relief for foreign QDMTTs imposed in subsidiary jurisdictions, and
• enacted its domestic and worldwide systems prior to 1 January 2026 (with further ability for jurisdictions to have their regimes assessed by the Inclusive Framework in 2027 and 2028).
• The criteria for a jurisdiction to qualify as a SbS qualifying jurisdiction appear to have been designed to match the features of the US tax system. This is reflected in the fact that, as of 5 January 2026, the US is the only jurisdiction that has been approved on the OECD list of Qualified SbS Regimes. US-parented groups should therefore be able to benefit from an exemption from IIR and UTPR in respect of US and non-US profits going forward. Local QDMTTs will continue to apply to US groups.

The SbS Safe Harbour will apply for fiscal years starting on or after 1 January 2026 meaning that, for 2024 and 2025, US groups would still need to rely on the Transitional Country-by-Country Reporting Safe Harbour and the Transitional UTPR Safe Harbour. US headquartered groups will still be required to file a GloBE Information Return in respect of 2024 and 2025. Groups will be able to make the SbS Safe Harbour election in a new field that will be added to Section 1 of the GloBE Information Return.

 The existing Transitional UTPR Safe Harbour which was due to expire at the end of 2025 is set to be replaced with a new UPE Safe Harbour.

The new UPE Safe Harbour would disapply the application of foreign UTPRs in respect of the profits of Constituent Entities located in the same jurisdiction as the group’s ultimate parent, provided the domestic tax system of that jurisdiction satisfies certain conditions as follows:

• The jurisdiction’s eligible domestic tax system was enacted and in effect as at 1 January 2026, and
• The eligible domestic tax system is one that has:
  • at least a 20% statutory nominal corporate tax rate (after taking into account preferential adjustments and sub-national corporate income taxes);
  • a QDMTT or corporate alternative minimum tax based on financial statement income that applies a nominal rate of 15% to a substantial portion of income from domestic operations in the jurisdiction; and
  • no material risk that groups headquartered in the jurisdiction will be subject to an effective tax rate below 15% in respect of the overall profits of their domestic operations.

The UPE Safe Harbour would also apply for fiscal years commencing on or after 1 January 2026. An MNE Group will be able to make the UPE Safe Harbour election in a new field in the GloBE Information Return.

Under the Pillar Two rules, certain qualifying refundable tax credits are treated in a favourable manner from a Pillar Two perspective, with other non-qualifying credits and incentives treated unfavourably.

The new guidance amends the Pillar Two treatment of these non-qualifying credits and incentives through the introduction of a safe harbour that will deem top-up tax due in respect of certain “Qualified Tax Incentives” to be zero.

The safe harbour will be subject to a substance-based cap that is calculated by reference to the MNE Group’s payroll or tangible assets (the higher of 5.5% of eligible payroll costs or depreciation on tangible assets) in the jurisdiction. Alternatively, a five-year election can be made to apply a cap equal to 1 percent of the carrying value of tangible assets in the jurisdiction, subject to certain conditions.

In order to meet the Qualified Tax Inventive definition, the relevant incentive must be generally available to taxpayers. The Qualified Tax Incentives must be calculated by reference to expenditure incurred or output produced and could include:

• Enhanced allowances or super deductions, 
• Non-refundable tax credits,
• Income that is eligible for an exemption from corporate tax or income subject to a preferential rate, and
• An election can also be made to treat Qualified Refundable Tax Credits as a Qualified Tax Incentive for the purposes of the new SBTI Safe Harbour.

This will require taxpayers to assess the impact of making such elections each year to maximise the benefit retained from the incentives which they qualify for, including the R&D tax credit. The impact of the STBI Safe Harbour may require careful modelling as a result.  

 The OECD January 2026 package also introduces a new permanent ETR safe harbour, which would operate alongside and subsequently replace the Transitional CbCR Safe Harbour. The new Simplified ETR Safe Harbour is significantly more detailed than the equivalent test from the Transitional CbCR Safe Harbour, but is arguably not quite as complex as the full global minimum tax rules.

The calculation will be based on financial accounting data (rather than Country-by-Country Reporting data) which will then be subject to a number of adjustments. The Simplified ETR Safe Harbour will be available to MNE Groups from the beginning of 2027 or the beginning of 2026, in certain circumstances.

This should offer further opportunities to reduce the compliance and administrative burden of the Pillar Two rules. Taxpayers should assess the potential to make such elections to optimise their position while developing a robust, replicable process to track and comply with these obligations.

To allow sufficient time for the implementation of the new Simplified ETR Safe Harbour, the Transitional CbCR Safe Harbour is extended for one year (i.e., to all fiscal years commencing on or before 31 December 2027 but not including fiscal years that end after 30 June 2029).