The OECD on January 5 announced an agreement to implement a “side-by-side” arrangement that effectively exempts U.S.-parented multinational enterprises (MNEs) from the scope of most of the Pillar Two global anti-base erosion (GloBE) rules for accounting periods commencing on or after January 1, 2026.
Pillar Two compliance and reporting obligations remain in place for the 2024 and 2025 fiscal years and U.S.-parented MNEs will continue to have Pillar Two reporting and compliance obligations for jurisdictions that have adopted a qualified domestic minimum top-up tax (QDMTT).
In addition to the side-by-side arrangement, the 88-page administrative guidance package introduces other safe harbors, including:
- A permanent simplified effective tax rate (ETR) safe harbor to streamline compliance and reporting
- A substance-based tax incentive safe harbor that will eliminate top-up tax arising from nonrefundable credits and incentives such as the U.S. R&D and energy credits
- An ultimate parent entity (UPE) safe harbor to replace the transitional UTPR safe harbor
The guidance package also extends the transitional country-by-country (CbC) reporting safe harbor for one year to include tax years beginning on or before December 31, 2027.
The side-by-side (SbS) safe harbor should significantly reduce future compliance burdens for U.S. companies, but it is not scheduled to be effective until 2026. U.S.-parented MNEs will still have significant compliance and reporting responsibilities for 2024 and 2025 based on prior rules. The timeline for implementation in member countries will also be important, and the OECD is still working on some aspect of the guidance. The new rules could affect foreign-parented U.S. entities and foreign subsidiaries of U.S. MNEs in important ways. Companies should carefully evaluate the guidance for its potential impact on international tax planning and reporting.
Background
The global anti-base erosion (GloBE) model rules issued under Pillar Two are designed to ensure that large MNEs have an effective tax rate of 15% in each jurisdiction in which they operate. They generally apply to MNEs with annual consolidated revenues of at least EUR 750 million in at least two out of the prior four accounting periods. While more than 56 jurisdictions enacted domestic legislation implementing Pillar Two, including all EU member states, the U.S. did not adopt similar legislation.
In his first day in office, President Donald Trump issued a memorandum to clarify that the “Global Tax Deal” had no force or effect in the U.S., and directing the secretary of the Treasury and the U.S. permanent representative to the OECD to notify the global organization that any commitments made by the Biden administration regarding the global tax deal had no force or effect in the U.S. absent an act by Congress adopting the relevant provisions of the deal.
On June 28, 2025, the G7 members released a statement outlining a proposal for a side-by-side solution to address U.S. concerns. Following this announcement, the OECD Inclusive Framework members developed a side-by-side safe harbor along with other safe harbors introduced in the new guidance.
SbS and UPE Safe Harbors
While reiterating that the adoption of a coordinated global minimum tax should continue to be the primary system for ensuring minimum taxation, the Inclusive Framework acknowledges in the new guidance that some jurisdictions may already have implemented tax regimes that incorporate minimum taxation requirements on the domestic and foreign income of MNE groups headquartered in those jurisdictions aligned with the global minimum tax framework.
The SbS safe harbor will be available only to MNE groups whose UPE is located in a jurisdiction that has both an eligible domestic tax regime and an eligible worldwide tax regime. These tax regimes will be eligible only if they effectively achieve a minimum level of taxation of MNE groups’ domestic and foreign operations. MNE groups that elect this safe harbor will not be subject to the income inclusion rule (IIR) or the undertaxed profits rule (UTPR).
For jurisdictions with regimes that meet only the domestic part of the eligibility criteria, the UPE safe harbor will provide a safe harbor with respect to the domestic profits of MNE groups headquartered in jurisdictions that have a preexisting eligible domestic tax regime. When it elects the safe harbor, an MNE group will not be subject to the UTPR on the profits located in the UPE jurisdiction.
At the request of member jurisdictions, the Inclusive Framework will assess the jurisdictions’ preexisting tax regimes against the eligibility criteria for a qualified SbS or UPE regime by the end of the first half of 2026. The Inclusive Framework will maintain a central record of those jurisdictions.
Both the SbS and UPE safe harbors will apply for fiscal years beginning from January 1, 2026.
The SbS safe harbor was written specifically to fit the parameters of the current U.S. international tax regime, and the U.S. has been recognized as a qualified SbS regime and added to the OECD’s central record. Other countries that meet the eligibility requirements could access the safe harbor in the future, but as of January 7, 2026, no other country had been added to the list as having a qualified SbS regime. The agreement will require the U.S. to notify the OECD if any future legislative changes affect major aspects of its international tax system, and the SbS safe harbor will also be subject to a future assessment (“stocktake”) to ensure it is meeting the policy objectives of Pillar Two. The UPE safe harbor also appears written specifically to ensure that U.S. subsidiaries of foreign groups are not subject to the UTPR.
Simplified ETR Safe Harbor
The new simplified ETR safe harbor is at the crux of the new guidance, taking up about 50 pages of the 88-page document. This safe harbor seeks to address a key concern of the business community by substantially reducing the compliance burden associated with the global minimum tax. Under this safe harbor, an MNE group’s ETR is determined based on a simplified calculation that relies on the income and taxes drawn from the MNE group’s reporting packages with minimal adjustments. Both income and taxes are calculated based on the financial accounting data used to prepare the MNE group’s consolidated financial statements.
The simplified income calculation under the safe harbor incorporates a limited number of adjustments, including the removal of dividends and equity gains and losses, so that the simplified ETR is not distorted by including income that is commonly exempted from tax and that is excluded under the GloBE rules. In many cases, these basic adjustments to remove dividends and equity gains and losses are expected to be the only adjustments an MNE group will make to the jurisdictional income calculation.
Similarly, the simplified taxes calculation is based on the income tax expense reported in the financial accounts and incorporates deferred tax accounting to address the impact of timing differences and to minimize recordkeeping burdens. Deferred tax expense movements related to deferred tax liabilities are not included in the computation if the MNE group would have been required to determine whether they may reverse after five years and then trace how long it takes for them to reverse under the GloBE rules (the recapture rule). This exclusion minimizes the recordkeeping burden imposed by the recapture rule, which was a key simplification measure identified by Business at OECD (BIAC). Deferred tax liabilities that relate to items that are not covered by this recapture rule, such as cost recovery allowances on tangible assets or capitalized R&D expenditure, are included in simplified taxes.
The simplified ETR safe harbor will be available to MNE groups in all jurisdictions from the beginning of 2027 or the beginning of 2026 in certain circumstances.
The new permanent ETR safe harbor replaces the transitional simplified ETR safe harbor, which is available only up to and including fiscal year 2026 and was based on data from the CbC report. The new safe harbor takes a much different approach. Similar to GloBE calculations, the starting point of the new ETR test is the financial statement, but the new test requires fewer adjustments. For multinationals that have already invested heavily in Pillar Two data collection and reporting capabilities, a full GloBE calculation may not be much more complex than the new ETR safe harbor. For multinationals that have not yet invested heavily in Pillar Two compliance, the new ETR method may offer helpful simplification.
Extension of Transitional CbC Report Safe Harbor
The Inclusive Framework also agreed to an extension of the transitional CbC report safe harbor for one year. Under the new guidance, the transitional CbC report safe harbor will be extended so it applies to fiscal years starting on or before December 31, 2027, but not including a fiscal year that ends after June 30, 2029.
Substance-based Tax Incentive (SBTI) Safe Harbor
In recognition of the importance of tax incentives as a tool to promote investment and economic development, the Inclusive Framework adopted a new safe harbor that allows MNE groups to continue to benefit from certain tax incentives that are strongly connected to economic substance in the granting jurisdiction.
The SBTI safe harbor allows an MNE group to treat certain qualified tax incentives (QTIs) as an addition to the covered taxes of the constituent entities located in the jurisdiction, similar to how refundable credits are treated under prior guidance. A QTI is defined as an incentive that is generally available to taxpayers and is calculated based on expenditures incurred (an expenditure-based incentive) or on the amount of tangible property produced in the jurisdiction (a production-based tax incentive). QTIs do not include provisions that merely affect the timing of cost recovery, such as expensing provisions.
A substance cap limits the allowance for QTIs by reference to the amount of substance in the jurisdiction. The cap is equal to the greater of 5.5% of the payroll costs or depreciation of tangible assets in the jurisdiction. On an elective basis, the MNE group can use an alternative cap that is equal to 1% of the carrying value of tangible assets in the jurisdiction.
The SBTI safe harbor will apply to fiscal years beginning from January 1, 2026.
The agreement on the SBTI safe harbor is a significant win for the U.S., which had for years been pushing for parity between nonrefundable and refundable credits. Under the agreement, domestic entities using nonrefundable credits to reduce the effective tax rate below 15% could escape the top-up tax. Foreign subsidiaries of domestic U.S. MNEs may also be able to reduce QDMMT liability in foreign countries with nonrefundable incentives that qualify as QTIs.
Financial Statements
U.S. GAAP requires the effect of tax law and rate changes to be recorded in the period of enactment, the date the legislation becomes law, rather than the effective date.
Legislative processes vary among foreign jurisdictions and can be complex. Incorrect assumptions about enactment dates could result in tax impacts being recognized in an incorrect period. An entity must monitor jurisdictional changes and apply judgment to determine when a law is considered “enacted” for U.S. GAAP purposes.
Companies should consider whether updates to their MD&A disclosure and risk factors are warranted based on the principles reached in the agreement.
Next Steps
The guidance package will have a significant impact across most international structures, including U.S.-parented MNEs, domestic subsidiaries of foreign parents, and the foreign subsidiaries of U.S. parents. The guidance is largely positive and could reduce compliance and reporting burdens for U.S. and foreign companies alike. But the rules remain a complex mix of overlapping safe harbors with varying effective dates, and the guidance will need to be implemented in foreign jurisdictions before it takes effect. Companies should carefully assess the impact on compliance requirements and financial statements and should consider modeling planning scenarios.
Please visit BDO’s International Tax Services page for more information on how BDO can help.