OECD Pillar Two Side-by-Side Safe Harbor Package: Technical Review And Implications

Highlights

• The Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework (Inclusive Framework) on January 5, 2026, released its Side-by-Side (SbS) Safe Harbor package (SbS Package) to streamline Pillar Two's global minimum tax rules and align them with domestic tax regimes.
• Effective January 1, 2026, this eliminates any top-up tax under the income inclusion rule for U.S.-parented groups that elect the new SbS Safe Harbor, and the undertaxed profits rule is deemed zero for those groups' controlled domestic and foreign operations.
• The SbS Package expands and introduces additional safe harbor elections, as well as revised and expanded treatment of tax incentives. It also preserves the right of a market jurisdiction to impose a qualifying domestic minimum top-up tax and provides for a "stocktake" by (most likely) 2029 to assess any distortionary effects and encourage additional countries to qualify. The stocktake will also consider the integrity of the Pillar Two Model Rules.
• The SbS Package does not apply retroactively to 2024 or 2025 but commences for fiscal years beginning on or after January 1, 2026, meaning that U.S. and other multinational enterprises must still comply with full Pillar Two Model Rules for 2024 and 2025.

On January 5, 2026, the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework (Inclusive Framework) released its Side-by-Side (SbS) Safe Harbor package (SbS Package) to streamline Pillar Two's global minimum tax rules and align them with domestic tax regimes.¹ For U.S.-parented groups that elect the new SbS Safe Harbor, this eliminates any top-up tax under the income inclusion rule, and the undertaxed profits rule is deemed zero for the group's controlled domestic and foreign operations effective January 1, 2026.

The SbS Package also expands and introduces additional safe harbor elections and revised and expanded treatment of tax incentives, preserves the right of a market jurisdiction to impose a qualifying domestic minimum top-up tax and provides for a "stocktake" by (most likely) 2029 to assess any distortionary effects and encourage additional countries to qualify. The stocktake will also consider the integrity of the Pillar Two Model Rules.

Importantly, the SbS Package does not apply retroactively to 2024 or 2025 but commences for fiscal years beginning on or after January 1, 2026, meaning that U.S. and other multinational enterprises must still comply with full Pillar Two Model Rules for 2024 and 2025.

Background

The Pillar Two Model Rules generally provide that in scope multinational enterprises (MNEs) are subject to a minimum effective tax rate of 15 percent on a per-jurisdiction basis. The Model Rules are intentionally sequenced and include a series of interlocking rules:

• Starting with the Qualified Domestic Minimum Top-Up Tax (QDMTT), which is imposed by the market jurisdiction.
• Followed by the Income Inclusion Rule (IIR), which is applied on a top-down basis generally by the parent jurisdiction to any remaining low-taxed profits.
• Finally, the Undertaxed Profits Rule (UTPR), which functions as a backstop to the two prior rules and allocates residual top-up tax among jurisdictions that have adopted a "qualified" UTPR (the UTPR allows other jurisdictions to top up the parent jurisdiction if its effective tax rate is below 15 percent).
• The Subject to Tax Rule (STTR) is a treaty-based backstop that countries can implement on a bilateral basis.

Congressional Republicans expressed concern over the UTPR and treatment of the U.S. research credit, which is not refundable. On its first day, the Trump Administration issued an executive order declaring it was not going to follow the Biden Administration's agreement on Pillar Two. (See Holland & Knight's previous Taxes Magazine article, "The Knight Watch – A Look at President Trump's America First Trade Policy Executive Order and International Tax; Proposals of Retaliatory Taxes to Counter 'Discriminatory' Tax Practices," May 27, 2025) In response to the UTPR, the U.S. House of Representatives Committee on Ways and Means and Senate Committee on Finance proposed increasing taxes on investors in foreign countries that imposed the UTPR on U.S. MNEs (through the proposed Section 899, sometimes referred to as the "retaliatory" or "revenge" tax). The tax writing committees, however, ultimately withdrew proposed Section 899 after the G7 countries agreed to a four-pronged proposal to address Pillar Two. (See Holland & Knight' previous alert, "Treasury Secretary Asks for Removal of Section 899 Measures from One Big Beautiful Bill," June 27, 2025).

SbS Package

The SbS Package introduces elective safe harbors under which qualifying groups essentially are not subject to additional IIR/UTPR top-ups, while retaining each country's QDMTT.

Under the new rules, the U.S. tax system, with a 21 percent corporate income tax and anti-deferral controlled foreign corporation (CFC) regime that taxes certain foreign earnings of U.S. shareholders, will interact with Pillar Two differently.² U.S. policymakers and business groups have publicly commented on the SbS Package as crucial for protecting American firms.³ Historically, the U.S. has not enacted Pillar Two's IIR/UTPR rules and objected to other countries' attempts to apply Pillar Two mechanisms to U.S.-parented groups.⁴ The OECD's SbS package is best understood as a coexistence framework: It introduces elective safe harbors (e.g., the SbS and Ultimate Parent Entity (UPE) Safe Harbors) under which MNE groups headquartered in an eligible jurisdiction, such as the U.S., can have an IIR/UTPR pickup treated as zero, while explicitly preserving QDMTT exposure in jurisdictions that have adopted a domestic minimum top-up tax.

SbS Safe Harbor

Application and Eligibility

Commencing in fiscal year 2026, an MNE group can elect an SbS Safe Harbor provided its UPE is located in a jurisdiction that has adopted a "Qualified SbS" tax regime, which has two main criteria:

1. Eligible Domestic Tax System. A corporate tax regime with a nominal rate ≥ 20 percent and corporate alternative minimum tax based on financial statement income of ≥ 15 percent
2. Eligible Worldwide Tax System. A comprehensive tax regime applicable to all resident corporations on foreign income covering both active and passive foreign income with no major carve-outs and crediting of foreign minimum taxes on par with other taxes and crediting domestic minimum top-up taxes on the same basis. There must be no material risk that the overall profits of foreign operations will be taxed below 15 percent.

As of the date of the Inclusive Framework, the OECD's updated central record shows the U.S. as the only jurisdiction that meets these criteria with transitional qualified status for a Qualified SbS tax regime. Though no other jurisdictions are listed, the framework is jurisdiction-neutral, and other Inclusive Framework members may request an assessment in 2027 or 2028 to determine whether their domestic tax systems qualify.

If an MNE group elects the SbS Safe Harbor, any top-up tax under the IIR and UTPR is deemed zero for the group's controlled domestic and foreign operations. The safe harbor election requires a one-time election on the OECD's GloBE Information Return (GIR) and significantly streamlines detailed calculations and reporting for IIR/UTPR purposes. Importantly, the SbS Safe Harbor does not eliminate the 15 percent rule itself or QDMTTs. The SbS Safe Harbor also does not apply to MNEs whose UPE is not in a Qualified SbS tax regime. That means any group with a foreign parent in a nonqualifying jurisdiction cannot elect and remains fully subject to IIR/UTPR on worldwide income. The SbS Safe Harbor is a UPE-jurisdiction test (not an ownership test), so overlapping shareholders do not confer eligibility. In illustration, if a UPE in a nonqualified country is 50 percent owned by a Qualified SbS group, that UPE's group cannot use the SbS Safe Harbor. In short, at this time, only groups owned by a U.S. parent can switch off Pillar Two top-ups, via an SbS Safe Harbor election.

Takeaways

Outbound MNEs

U.S.-headquartered MNEs should consider electing the SbS Safe Harbor for fiscal years commencing on or after January 1, 2026, because it will effectively deem top-up taxes to be zero for IIR and UTPR purposes on a groupwide basis. Note, this relief is elective (not automatic) and made through the GIR. Importantly, QDMTTs continue and are unaffected by an SbS Safe Harbor election – i.e., QDMTTs in jurisdictions that have adopted them will still be computed under the normal rules, and U.S. MNEs will still need to manage domestic minimum tax regimes and foreign QDMTTs under the applicable rules.

Practically, even with an SbS Safe Harbor election, outbound U.S. groups should still plan for ongoing QDMTT modeling/GIR filing (though the SbS Safe Harbor election streamlines certain GIR fields, it does not eliminate QDMTT-related GIR reporting) and careful coordination of U.S. "minimum tax" rules with foreign QDMTTs, including analyzing whether, and to what extent, those QDMTTs are creditable under the applicable U.S. foreign tax credit regime.

Importantly, the SbS Safe Harbor does not affect fiscal years commencing before January 1, 2026, and U.S. MNEs should maintain a compliance plan to the extent foreign IIR rules could apply (including via intermediate-parent entities). U.S. MNEs should take advantage of the UTPR Safe Harbor for 2025. For 2024 and 2025, U.S. MNEs will need to file the complete GIR. For transition years, the Country-by-Country Reporting (CbCR) Safe Harbor remains a key tool for easing compliance and reporting burdens, and many groups will continue to rely on it where the jurisdictional effective tax rate (ETR) is comfortably above 17 percent.

Inbound MNEs

By contrast, U.S.-inbound MNEs generally cannot access the SbS Safe Harbor as long as their UPE is not in a jurisdiction listed as having a Qualified SbS tax regime – meaning these MNEs remain subject to historical Pillar Two outcomes (e.g., parent-country IIR pickup and/or residual UTPR allocation).⁵ This includes profits earned in the U.S. if the MNEs Pillar Two jurisdictional ETR computations drive a top-up result. Inbound MNE groups should therefore plan for full Pillar Two compliance, including ETR computations, safe harbor testing, GIR filings and local compliance. That could change if a country is able to satisfy the requirements for the SbS Safe Harbor.

Sandwich Structures

Finally, in any "sandwich" scenario (e.g., U.S. operations owned by a foreign parent with foreign CFCs underneath the U.S. operations), MNE groups should identify the risk of disproportionate compliance and/or unexpected top-up mechanics. The U.S. subsidiary will need to apply the U.S. CFC rules in addition to Pillar Two, which can result in double taxation. The U.S. Congress had considered a mechanism to reduce double taxation in the Build Back Better Act by allowing a downward credit from the foreign UPE's application of the IIR to offset global intangible low-tax income (GILTI), but Congress has not adopted such a mechanism. Once again, if a foreign country's laws can satisfy the two prongs of the SbS Safe Harbor, then both the U.S. subsidiary and its CFCs would not be subject to the IIR but would still be subject to GILTI.

GILTI Allocation

For tax years beginning before December 31, 2025, the Model Rules provided for a GILTI allocation key to ensure top-up taxes were associated with lower tax jurisdictions where a top-up tax may be owed. The SbS Safe Harbor does not extend GILTI allocation, which could create double taxation for both domestic and foreign groups subject to NCTI.

Section 899

In view of the SbS Safe Harbor, it is unlikely Congress will move forward with proposed Section 899. However, the provision could come back if foreign jurisdictions do not implement the SbS Safe Harbor.

UPE Safe Harbor

Application and Eligibility

The UPE Safe Harbor, effective January 1, 2026, replaces the expiring transitional UTPR Safe Harbor and targets cases where the UPE is headquartered in a jurisdiction that has a preexisting eligible domestic tax regime but with no full worldwide taxation. No jurisdiction has been identified so far.

If the UPE resides in a Qualified UPE jurisdiction (defined essentially by the same domestic tax criteria as above but without requiring a global system) and elects the UPE Safe Harbor, then the UTPR liability is deemed zero only for the UPE's own jurisdiction. In practice, this means no UTPR top-ups on profits sourced in the UPE's country and if the jurisdiction is listed as "Qualified." For most taxpayers, the UPE Safe Harbor offers limited new relief because it avoids the UTPR only on domestic profits but does not prevent an IIR on foreign income or UTPR on foreign subsidiaries.

Takeaway

U.S.-headquartered MNEs are likely to rely mainly on the broad SbS Safe Harbor. The UPE Safe Harbor mirrors the U.S. domestic tax test and is largely of academic interest for U.S. taxpayers. However, it may become useful if a foreign parent country (e.g., a new UPE Qualified regime) seeks to neutralize UTPR on its domestic income. This safe harbor could apply to high-tax countries such as Brazil and India, which could protect groups headquartered in those countries from the UTPR.

Substance-Based Incentives Safe Harbor

Application and Eligibility

The Inclusive Framework also creates a Substance-Based Tax Incentives (SBTI) Safe Harbor to preserve the benefit of certain investment/research and development (R&D) tax incentives against Pillar Two top-ups. Under the new rules, an MNE may elect to treat Qualified Tax Incentives (QTIs) as additional taxes paid, up to a cap. QTIs include two types of incentives:

1. expenditure-based incentives (e.g., tax credits or deductions tied to actual spending)
2. production-based incentives (e.g., incentives based on physical output or electricity)

If elected, these incentives are added back to the income- and profit-based taxes counted in the Pillar Two ETR, effectively reducing or eliminating any top-up tax that arose because the incentive cut local tax below 15 percent. However, a substance cap limits the relief – the added taxes cannot exceed the greater of 5.5 percent of "eligible payroll" (i.e., certain payroll costs that are capitalized to certain tangible assets) or depreciation of tangible assets or (optionally) 1 percent of the book value of such assets (for five years) in each jurisdiction. This ensures only substantial and genuine economic incentives (e.g., large R&D programs or manufacturing investments) are covered. For example, U.S. taxpayers with large R&D credits can include those credits under the SBTI Safe Harbor (up to the cap) to avoid Pillar Two top-up on that amount. Conversely, aggressive "profit-based" incentives that exceed real expenditure would not qualify.

Takeaway

The SBTI Safe Harbor may benefit U.S. MNEs and other MNEs that receive substantial tax credits (R&D, investment, production, etc.) by reducing their Pillar Two top-up tax, but the relief is limited by substance caps. It prevents standard investment or R&D credits from mechanically triggering a low-ETR jurisdiction but does not allow unlimited offset. Taxpayers should estimate potential QTI amounts and caps in high-incentive countries, as claiming the SBTI Safe Harbor can significantly reduce top-up tax in those jurisdictions.

Simplified ETR Safe Harbor and CbCR Extension

Application

The Inclusive Framework also introduces a new Simplified ETR Safe Harbor to ease compliance. Under this option, an MNE group in a given jurisdiction can use financial accounting data (with prescribed adjustments) to compute an ETR. If the Simplified ETR is ≥ 15 percent, the top-up tax is deemed zero for that jurisdiction. This safe harbor applies to fiscal years beginning on or after December 31, 2026 (with optional early adoption on or after December 31, 2025). It preserves key Pillar Two elements (e.g., deferred tax, exclusions, etc.) but relies on audited accounts instead of granular Pillar Two calculations. For example, an MNE could compare its statutory pre-tax profit and reported income tax expense by jurisdiction (adding back dividends, removing non-deductibles, etc.) to demonstrate an ETR that exceeds 15 percent. The intent is to allow an audit-based shortcut where the math is already above 15 percent.

To ease the 2024 to 2026 transition, the Inclusive Framework extends the existing transitional CbCR Safe Harbor through fiscal years beginning or before December 31, 2027. Under the transitional CbCR Safe Harbor, if a jurisdictional ETR is ≥ 17 percent, no Pillar Two tax is due, and the MNE may use a simplified CbCR disclosure instead of full computations and detailed reporting. For 2027, the transitional threshold remains 17 percent. Beyond 2027, the Simplified ETR Safe Harbor (15 percent) will take over.

Takeaway

MNEs should prepare to leverage the Simplified ETR Safe Harbor when available. Starting 2027, high-ETR jurisdictions may be fully exempted from top-ups if financial-reporting-based ETRs exceed 15 percent. This could greatly minimize reporting burdens. Meanwhile, the CbCR 17 percent safe harbor through 2027 offers interim relief. MNEs should align their accounting processes to be able to meet these tests through data mapping, reporting-package alignment and jurisdiction-by-jurisdiction modeling. This positions U.S. MNEs to rely on the Simplified ETR Safe Harbor once available, where it provides meaningful compliance relief, given that the test is still highly technical and complex, requiring inputs and controls that are akin to full compliance in many respects.

Conclusion

Going forward, the SbS Package will require implementation in Inclusive Framework jurisdictions, as they must incorporate the SbS and UPE Safe Harbor rules into law for 2026 onwards. Some U.S. MNEs would like the IRS to accept the GIR for transmission to applicable jurisdictions; however, it is unclear whether the IRS can accept the filing without legislation.

The SbS Package reflects the success of the Amsterdam Dialogue, a discussion among countries on consistent implementation of the rules that include simplifications.

As previously noted, a formal stocktake is planned by (most likely) 2029 to assess any distortionary effects and encourage additional countries to qualify. One of the items of concern is potential migrations of groups to certain jurisdictions. However, the stocktake will be undertaken with limited data – only three years of returns and with only one year of the SbS Safe Harbor in effect. Query whether a 2029 review is too soon to assess the SbS Safe Harbor and, more generally, the effectiveness of Pillar Two.

In the meantime, MNE groups potentially subject to Pillar Two rules for fiscal years 2024 and 2025 (including via intermediate-parent entities) should continue complying with existing Pillar Two rules (e.g., filing CbCR Safe-Harbor disclosures as needed) and plan to use the new SbS Package safe harbors once they take effect.

Footnotes

1. OECD (2026), Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two), SbS Package: Inclusive Framework on BEPS.

2. As context, the U.S. already imposes an additional shareholder-level tax on certain CFC earnings. Under the One Big Beautiful Bill Act (OBBB), GILTI is replaced (beginning in 2026) by the term net CFC tested income (NCTI), with a reduced Section 250 deduction that yields an effective U.S. tax rate of roughly 12.6 percent on NCTI inclusions. For Pillar Two purposes, taxes arising under NCTI are treated as CFC taxes and not as a host-country QDMTT (such that QDMTTs are computed on a stand-alone basis and CFC taxes are addressed through allocation/credit mechanics rather than being treated as a domestic minimum tax in the source jurisdiction).

3. U.S. Department of the Treasury Secretary Scott Bessent framed the agreement as affirming U.S. tax sovereignty, and House Ways and Means Chairman Jason Smith (R-Mo.) and Senate Finance Chairman Mike Crapo (R-Idaho) (in a joint January 5, 2026, statement) hailed it as a milestone "putting America First" in global tax policy. Business associations echoed this sentiment, with the National Foreign Trade Council calling the SbS Package "a crucial step forward," noting it lets robust systems such as the U.S. tax code "coexist" with Pillar Two.

4. For example, the House-passed version of the OBBB featured the proposed Section 899 "retaliatory" tax targeting discriminatory foreign taxes (often discussed in the context of Pillar Two); however, the Treasury Department later requested its removal in connection with the G7/OECD SbS understanding, with the final legislation omitting proposed Section 899 in its entirety.

5. For UTPR modeling, the Inclusive Framework also included an allocation clarification to reduce the risk that non-adopting jurisdictions collect more than their pro rata share of residual UTPR top-up.

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