OECD's ‘side-by-side’ package offers a path for US multinational enterprises

OECD side-by-side package: Overview

Many U.S. MNEs would be exempt from the main charging provisions of Pillar Two under a comprehensive set of measures that the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS) issued on Jan. 5, 2026.

The “side-by-side (SbS) package” establishes a framework for the U.S. tax system to coexist with Pillar Two Global Anti-Base Erosion (GloBE) rules, primarily by providing several safe harbors. The SbS package is a product of a tax agreement between G7 countries and the United States in June 2025 for U.S. lawmakers to remove from their broad taxation and spending bill a proposed new tax targeting foreign measures deemed unfair, including certain Pillar Two provisions.

The OECD/G20 Inclusive Framework approved and released the SbS package in the form of administrative guidance designed to simplify compliance with the GloBE rules while preserving the integrity of the 15% global minimum tax regime.

The main component of the new guidelines is the SbS safe harbor. By electing the safe harbor, MNE groups whose UPE is in a jurisdiction that meets the requirements of a qualified SbS regime—as determined by the Inclusive Framework—would not be subject to the IIR or UTPR.

Notably, the latest update of the OECD’s central record of legislation identifies the United States as the only jurisdiction with a qualified SbS regime, effective for fiscal years beginning on or after Jan. 1, 2026.

All MNE groups, including those eligible for the SbS safe harbor, remain subject to QDMTT in all QDMTT jurisdictions in which they operate. In all QDMTT jurisdictions, the QDMTT for all MNE groups must continue to be calculated without the pushdown of taxes on controlled foreign companies or foreign branches.

Despite introduction of the SbS package, Pillar Two remains highly relevant for U.S. MNE groups and continues to drive significant compliance obligations, data collection challenges, and strategic tax plannings considerations.

Details of the OECD side-by-side package

The OECD SbS package includes a system that exempts groups headquartered in jurisdictions with qualifying domestic minimum tax regimes from rules like IIR and UTPR, while offering compliance and incentive-based relief.

Specifically the SbS package includes:

• An SbS system recognizing certain pre-existing domestic and worldwide minimum tax regimes
• A permanent simplified ETR safe harbor (SESH)
• A one-year extension of the transitional country-by-country reporting (CbCR) safe harbor
• A substance-based tax incentive (SBTI) safe harbor

For U.S. MNEs, the package offers a potential shield from Pillar Two’s primary charging rules, enabling avoidance of IIR and UTPR top-up taxes. This is particularly important for U.S. groups that expected to lose much of the benefit from domestic incentives, as the inclusion of SBTI can further reduce top-up tax exposure, while the SESH helps ease unnecessary administrative burdens.

Jurisdictions implement Pillar Two by enacting domestic legislation that incorporates the OECD’s GloBE framework. To align with the SbS package, any country adopting global minimum tax rules must do so in a manner consistent with the Inclusive Framework’s agreed SbS system and update its domestic regulations or administrative guidance to include the SbS safe harbor.

Below is a comparison table outlining the key differences between the original OECD Pillar Two GloBE rules and the SbS package for U.S. MNEs.

The side-by-side system: The SbS and UPE safe harbors

The SbS system is a targeted safe harbor framework that allows jurisdictions with pre-existing minimum tax regimes to operate alongside the GloBE IIR/UTPR architecture without triggering IIR or UTPR for eligible MNEs.

Under the SbS package, the OECD recognizes that these pre-existing minimum tax regimes already tax domestic and foreign income at a minimum level, achieving policy outcomes broadly aligned with Pillar Two. Where such regimes are sufficiently robust, duplicative GloBE taxation is unnecessary.

The SbS system provides two main safe harbors: the SbS safe harbor and UPE safe harbor.

SbS safe harbor

The SbS safe harbor allows an MNE group to elect that the top-up tax for a jurisdiction is deemed zero under the IIR and UTPR if its UPE is in a jurisdiction with a qualified SbS regime. This election also applies to interests in joint ventures (JVs) or JV subsidiaries.

A jurisdiction is deemed to have a qualified SbS regime if it has eligible domestic and worldwide tax systems.

An eligible domestic tax system requires the following:

• A statutory corporate income tax (CIT) rate of at least 20% (including subnational taxes)
• A QDMTT or alternative minimum tax based on financial statement income, subject to appropriate adjustments consistent with the policy objectives of minimum taxation, at a nominal rate of at least 15%, and applicable to a substantial portion of the aggregate income of in-scope MNE groups’ operations in the jurisdiction
• No material risk that domestic MNE profits will fall below 15% ETR, accounting for GloBE-consistent incentives and safe harbors

An eligible worldwide tax system requires the following:

• A comprehensive tax regime applicable to all resident corporations on foreign income (including active and passive income from branches and controlled foreign corporations (CFCs), regardless of distribution) and is only subject to limited income exclusions that are consistent with the policy objectives of minimum taxation
• Mechanisms that operate unilaterally to address BEPS risks
• No material risk that domestic MNEs pay less than a 15% ETR on foreign profits, accounting for GloBE-consistent incentives and safe harbors

Additionally, the jurisdiction must provide foreign tax credits for QDMTTs and enact these systems by Jan 1, 2026 (or later, see effective date).

SbS safe harbor effective date: The SbS safe harbor applies to fiscal years starting on or after Jan. 1, 2026, or later as listed in the Central Record. Jurisdictions adopting it after this date should apply retrospectively since it is fully relieving for taxpayers. If constitutional or legal constraints prevent this, implementation must occur at the earliest practical date. It does not apply to fiscal years before Jan. 1, 2026.

UPE safe harbor

The UPE safe harbor allows an MNE group to elect that top-up tax under the UTPR is zero if its UPE is in a jurisdiction with a qualified UPE regime.

A qualified UPE regime requires an eligible domestic tax system with each of the following:

• A statutory CIT rate of at least 20% (including subnational taxes)
• A QDMTT or alternative minimum tax based on financial statement income, subject to appropriate adjustments consistent with the policy objectives of minimum taxation, at a nominal rate of at least 15%, and applicable to a substantial portion of the aggregate income of in-scope MNE groups’ operations in the jurisdiction
• No material risk that in-scope MNE groups headquartered in the jurisdiction will be subject to an ETR below 15% ETR on the overall profits of their domestic operations, accounting for GloBE-consistent incentives and safe harbors

Qualified jurisdictions are listed in the central record.

UPE safe harbor effective date: The UPE safe harbor is applicable for fiscal years on or after Jan. 1, 2026.

Additional safe harbors

Permanent simplified ETR safe harbor (SESH)

The SbS package introduces a new permanent simplified ETR safe harbor (SESH) that provides simplified calculations an MNE group can use to demonstrate that it will not have a top-up tax liability in a jurisdiction without the need to undertake the full GloBE computations.

The SESH test

When an MNE group elects to apply the SESH for a "tested jurisdiction," the top-up tax for that jurisdiction is deemed to be zero for the fiscal year. The mechanism of the safe harbor is a two-pronged test. The top-up tax for a tested jurisdiction is deemed to be zero if either of the following are true at the election of the filing constituent entity (FCE):

• The jurisdiction has a simplified ETR of at least the minimum rate, where the simplified ETR is calculated by dividing the simplified taxes by the simplified income
• The jurisdiction has a simplified loss

A tested jurisdiction includes entities such as constituent entities, permanent establishments, and certain joint ventures that require a separate ETR calculation under GloBE rules.

An FCE may elect to group eligible same-jurisdiction entities into a single tested Jurisdiction for the SESH, provided they meet ownership and election conditions. Note that an FCE is the specific legal entity within an MNE group that is responsible for preparing and submitting the GloBE Information Return to a tax authority.

Computation of simplified ETR

The simplified ETR is calculated by dividing the jurisdiction's "simplified taxes" by its "simplified income or loss." The calculations for simplified income and simplified taxes are based primarily on the financial accounting data used to prepare the MNE group's consolidated financial statements (CFS), with certain adjustments.

In jurisdictions that have adopted a QDMTT and require the use of a local financial accounting standard (LFAS), the MNE group will generally use that LFAS for the safe harbor calculation. However, these jurisdictions are encouraged to permit the use of the CFS accounting standard (e.g., international financial reporting standards or U.S. generally accepted accounting principles) to reduce compliance burdens.

A key simplification is that calculations are performed on an aggregated jurisdictional basis. MNEs generally do not need to compute simplified income and taxes on an entity-by-entity basis before aggregation, which significantly reduces the compliance effort, particularly where certain data (e.g., shared service costs) is only recorded at a consolidated level.

SESH eligibility, entry, and integrity rules

An MNE group is not allowed to elect the safe harbor for certain jurisdictions. It can elect SESH for a tested jurisdiction if it has no top-up tax liability in any fiscal year starting within the prior 24 months.

If the group later fails to qualify, it may re-elect after meeting the same 24-month no-liability condition under either full GloBE rules or a specified safe harbor, which includes the simplified calculation safe harbor for nonmaterial entities and any other agreed safe harbors.

To be eligible for the SESH, an MNE's computations must be consistent with four core principles to ensure data reliability and prevent arbitrage:

• Matching principle: Intragroup income is recognized no later than its corresponding expense.
• Full allocation principle: All income is allocated to a tested jurisdiction.
• Single expense and loss principle: Expenses and losses are deducted only once and in a single tested jurisdiction.
• Single tax principle: Taxes are recorded only once and in a single tested J=jurisdiction.

SESH effective date: The SESH generally applies to fiscal years starting on or after Dec. 31, 2026. Optionally, it may apply for a fiscal year beginning on or after Dec, 31, 2025, if certain conditions are met, such as QDMTT safe harbor eligibility, single-jurisdiction taxing rights, or all relevant jurisdictions adopting the safe harbor and the MNE group electing it accordingly.

Extension of the transitional country-by-country reporting safe harbor (TCSH)

To ensure a smooth transition, the existing TCSH is extended for one year, now applying to fiscal years beginning on or before Dec. 31, 2027, but not including a fiscal year that ends after June 30, 2029.

This provides temporary compliance relief until permanent SESH replaces TCSH. The TCSH-SESH transition rate of 17% will also apply to 2027 fiscal years.

Substance-based tax incentive (SBTI) safe harbor

The SBTI safe harbor is an election that the FCE can make, allowing an MNE group to treat qualified tax incentives (QTIs) as an addition to covered taxes of the constituent entities located in the jurisdiction. When the election is made, the amount of top-up tax in a tested jurisdiction that corresponds to QTIs for the fiscal year is deemed to be zero.

An SBTI safe harbor allows an MNE group to continue benefiting from specific tax incentives that are strongly connected to economic substance within a jurisdiction. This safe harbor recognizes that incentives provided for substantive activities are less susceptible to BEPS risks. It operates by reducing the top-up tax payable in a jurisdiction to the extent that the tax is attributable to the use of these incentives.

The increase to adjusted covered taxes is limited to the lower of:

• The amount of QTIs used in the fiscal year
• The substance cap for the tested jurisdiction

Qualified tax incentives (QTIs)

A QTI is a tax incentive that reduces a taxpayer’s liability for a covered tax. It is generally based on either qualifying expenditures (expenditure-based) or tangible property produced (production-based) in the jurisdiction.

Expenditure-based incentives are based on a portion of qualifying expenditures incurred by the taxpayer. An important limitation is that an expenditure-based incentive is not considered a QTI if the value of its tax benefit exceeds the amount of the expenditure incurred.

Production-based incentives are based on the amount of production or a reduction in industrial byproducts. To qualify, the incentive must be calculated based on the volume of tangible property produced in the jurisdiction, not its value or the revenue from its sale.

Unlike qualified refundable tax credits (QRTCs) or marketable transferable tax credits (MTTCs), QTIs are not included in GloBE income, meaning the treatment of an incentive as a QTI could be more beneficial to an MNE group than the treatment provided for QRTCs and MTTCs. 

An MNE group can make an annual election to treat a QRTC or a MTTC as a QTI, provided the credit itself qualifies as an expenditure- or production-based incentive. This election excludes the QRTC or MTTC from GloBE income. Instead, the tax credit is treated as a reduction to adjusted covered taxes before the QTI adjustment to increase adjusted covered taxes is applied in the same way as it applies to any other type of QTI. This election can be made for all or part of the QRTC or MTTC.

The amount of a QTI used in a fiscal year is one of the following:

• The tax credit used to reduce covered tax liability
• The enhanced allowance or super deduction claimed multiplied by the statutory tax rate
• The amount of income attributable to eligible expenditure that is exempt multiplied by the statutory tax rate; or, for preferential rates, that income multiplied by the difference between the statutory rate and the preferential rate.

Substance cap

The QTI adjustment is limited by a cap tied to payroll and tangible assets in the jurisdiction:

• Method 1 (default): the greater of 5.5% of the payroll costs or the depreciation and depletion expense in respect of eligible tangible assets
• Method 2 (elective): 1% of the carrying value of eligible tangible assets (excluding land), with a five-year election

SBTI safe harbor effective date: An FCE may elect the SBTI safe harbor for a tested jurisdiction for any fiscal year starting

ASC 740 considerations related to the OECD SbS package

Effects on financial statements

Consistent with ASC 740, which requires companies to reflect the effects of changes in tax law in the period that includes the enactment date, financial statements for calendar years 2024 and 2025 remain unaffected by the SbS package because legislation has not yet been enacted during those periods.

Since Pillar Two is enacted through domestic legislation, a disconnect may occur between the timing of jurisdictions’ enactment of the SbS package and the years to which the safe harbors ultimately apply.

For accounting purposes, this could require companies to accrue top-up taxes in financial statements for periods ending before enactment, even if those liabilities may ultimately be reduced or eliminated once legislation implementing the SbS package is enacted.

Companies should closely monitor legislative developments and evaluate and reflect the financial reporting implications of legislation as enacted in each applicable jurisdiction.

The Financial Accounting Standards Board indicated during 2023 that taxes under Pillar Two would be viewed similarly to an alternative minimum tax under ASC 740 and, therefore, deferred taxes would not be recognized or adjusted for the future effects of the Pillar Two minimum taxes. U.S. MNEs remain subject to QDMTTs and should continue to account for such QDMTTs under ASC 740.

Once SESH becomes enacted and effective, companies should re-evaluate any uncertain tax positions related to top-up tax exposure. Companies may reasonably conclude that no Pillar Two tax liability is probable for qualifying jurisdictions, eliminating the need to measure top-up tax exposure under full GloBE mechanics. This significantly narrows the scope of jurisdictions requiring complex tax forecasting.

The intersection of income tax provisions and Pillar Two SESH calculation

Under ASC 740, Pillar Two top-up taxes are generally treated as income-based taxes. The SbS package does not change this situation. However, the SESH relies heavily on financial accounting deferred tax expense, recast at the 15% minimum rate.

A key improvement over the TCSH is that the SESH disregards valuation allowances when determining simplified taxes, reducing the risk that valuation allowances (such as in loss jurisdictions) lower the ETR below 15% and force companies into full GloBE computations.

Similar treatment applies to uncertain tax positions (UTPs). The jurisdiction income tax expense (JITE) is adjusted to exclude taxes that are uncertain or not payable promptly. Tax expenses from uncertain positions or disallowed accruals are only included once paid, and current tax expenses not expected to be paid within three years are also excluded.

What does the OECD’s SbS package mean for the US’ section 899?

The OECD’s introduction of the SbS package is a major tax policy development that can be traced to May 2025, when the U.S. Congress proposed section 899 in a preliminary draft of the One Big Beautiful Bill Act (OBBBA).

Section 899 proposed to target inbound investment from countries that have in force what the United States deems to be an “unfair foreign tax.” The new section code would have had significant, complex repercussions for inbound business activities and investment from impacted countries, including:

• Increased tax rates on various classifications of income
• Modified application of tax treaties
• More stringent application of the base erosion and anti-abuse tax (BEAT)

In June, however, the U.S. Department of the Treasury announced an agreement with G7 countries under which global tax policies would respect the U.S. tax system and stop trying to tax U.S. MNEs on IIR and UTPR. In exchange, the U.S. agreed to drop section 899 from the OBBBA.

Following the G7’s agreement with the United States, the other 140-plus countries in the OECD inclusive framework needed to officially sign off on the technical details. The OECD’s announcement of the SbS package indicates those other countries have ratified it.

It remains to be seen, however, whether this global tax policy issue is, in fact, settled. U.S. congressional leaders removed section 899 from the OBBBA to show good faith, but some, including the chairs of the Ways and Means and Finance Committees, have explicitly stated they would revive it if any country slow-walks implementation of the agreement.

Also, while the SbS package mostly covers the 15% minimum tax under Pillar Two, some countries still have digital services taxes that target U.S. tech companies. To the extent the United States views these as unfair, section 899, or a version of it, remains a primary tool to counter them.

What the SbS package does not change

While the side-by-side package introduces meaningful relief, the following core Pillar Two requirements or concepts remain unchanged and continue to demand attention:

• QDMTTs: QDMTTs remain fully applicable to U.S.-parented and all other in-scope MNEs.
• Nonrefundable credits: Incentives not meeting the QTI definition continue to reduce ETR and can trigger top-up taxes.
• GloBE Information Return compliance: The obligation to file GloBE Information Return remains unchanged.
• Jurisdictional ETR: Calculation methodology and scope of jurisdictional ETR are unchanged.
• Double taxation: There is no resolution of double taxation from lack of push-down of U.S. parent-level taxes to QDMTT payers.
• Local law: Each jurisdiction’s implementation of QDMTT and GloBE rules remains in effect until enacted in the jurisdiction’s domestic legislation.

Next steps and key reminders for US MNEs

U.S. multinationals should take proactive steps to confirm eligibility, update compliance processes and align tax strategies with the new safe harbors. Consider the following: 

Jurisdictional mapping: Identify jurisdictions adopting UPE Safe Harbor, QDMTT rules, SESH and SBTI safe harbor and track effective dates and filing requirements.

Safe harbor eligibility: Confirm UPE jurisdiction qualifies for SbS safe harbor, model SESH using consolidated financials, and assess applicability of TCSH and SBTI safe harbor.

QDMTT readiness: Register for QDMTT in relevant jurisdictions, prepare data collection and reporting processes and validate foreign tax credit implications under U.S. law.

Incentive strategy: Review substance-based credits and incentives and make sure it aligns with SBTI safe harbor for QTI.

Governance and compliance: Update internal controls and documentation, integrate Pillar Two changes into tax risk registers, and prepare disclosures for financial statements and board reporting.

To help U.S. multinationals prepare for Pillar Two implementation and make the most of the OECD’s relief measures, here are some key reminders:

• Taxpayers must affirmatively elect the SbS safe harbor or UPE safe harbor to benefit from relief. Eligibility is determined by whether the UPE’s jurisdiction is listed in the OECD central record as qualified. Relief is only available if both the election is made and the jurisdiction is recognized.
• Even when the SbS safe harbor is elected, multinational groups are required to file the GloBE Information Return. Certain sections of the return may be simplified or waived, but the overall filing obligation remains in place.
• The QDMTT continues to apply as the first layer of Pillar Two taxation in all jurisdictions. The SbS safe harbor does not affect the operation or priority of QDMTT.
• The TCSH has been extended by one year. During the overlap period, taxpayers may choose between the TCSH and the SESH where both options are available.
• The availability of safe harbors and related relief depends on local legislative implementation and the effective dates published in the OECD central record. Taxpayers should confirm recognition and timing in each jurisdiction before relying on any safe harbor.

Final thoughts on the OECD SbS package

The SbS package is an important step for U.S. multinationals operating globally. By formally recognizing the SbS system, the OECD has created a compromise between Pillar Two and proposed section 899.

While the package offers relief and simplification, expect these global tax policies to continue to evolve. For example, the OECD has scheduled an “evidence-based stocktake” for 2029. That will be a critical review to determine whether this coexistence becomes permanent or remains a temporary measure.

Taxpayers should consult their advisors to understand how the SbS package may affect their obligations.