OECD Side-by-Side Administrative Guidance - Pillar Two

See our January 15, 2025, newsletter for an introduction to the GloBE rules

The Package provides simplifications by means of introducing four new safe harbours and extends the Transitional CbCR Safe Harbour by one year. Furthermore, the Package introduces a Side-by-Side System which acknowledge that certain jurisdictions may already have introduced tax regimes which incorporates minimum taxation for MNE Groups headquatered in that jurisdiction. Although the OECD considers that a coordinated implementation of the Pillar Two shall be the common approach, the Side-by-Side System acknowledge that eligible tax regimes may interact with the Pillar Two.

The Administrative Guidance will be added to the Commentary to the GloBE Model Rules.

Why it matters

The United States has expressed ongoing opposition to certain Pillar Two rules, particularly the UTPR, for US-parented groups (see our March 28, 2025, May 30, 2025, and July 1, 2025 newsletters for background). In response, US authorities had considered measures in Section 899 that could increase taxes on foreign jurisdictions implementing rules they deemed discriminatory. Following the agreement reached with the G7 in June 2025, which catered for certain exemptions from Pillar Two for US parented groups,Section 899 was withdrawn. The Side-by-Side System implements such exemptions and provides a structured framework for jurisdictions that do not fully adopt GloBE to coexist with Pillar Two, preserving the intended global minimum tax outcomes.

Side-by-Side System

• Side-by-Side Safe Harbour (SbS)
  Eligible MNE groups with an Ultimate Parent Entity (UPE) in a jurisdiction with a Qualified SbS Regime may elect this safe harbour. This requires that the jurisdiction has an eligible domestic and worldwide tax regime, amongst others at least a 20% statutory nominal corporate income tax rate and a comprehensive tax regime applicable to all resident corporations on foreign income. If electing SbS, the Top-up Tax applied under the Income Inclusion Rule (IIR) and the undertaxed payment rule (UTPR) shall be set to zero. This also applies to intermediate parent entities that would otherwise be subject to IIR.
  
  The Qualified SbS Regime is applicable as of the beginning of 2026. Therefore, MNE Groups qualifying for the safe harbour will still remain subject to Pillar Two in 2024 and 2025.

• UPE Safe Harbour
  The UPE Safe Harbour applies to the domestic profits of MNE Groups with a UPE in a jurisdiction that has an eligible domestic tax regime (which follows the same criterions as the SbS). If electing the UPE Safe Harbour, the Top-up Tax for the UPE and all of its Constituent Entities located in the UPE Jurisdiction shall be deemed to be zero for the purposes of the UTPR.
  
  The UPE Safe Harbour is applicable for fiscal years commencing on or after 1 January 2026.

MNE Groups that qualifies for SbS or the UPE Safe Harbour will still be subject to Qualified Domestic Minimum Top-Up Taxes (QDMTT) in all QDMTT jurisdictions in which they operate.

Jurisdictions with a qualified SbS or UPE Regime will be listed in a central record. The United States is currently the only jurisdiction which has obtained SbS qualified status. No Qualified UPE regimes have yet been included in the central record.

Other safe harbours and simplifications

The Package also introduces mechanisms to simplify compliance by introducing other safe harbours. Furthermore, the OECD commits to a work program to achieve additional clarifications and simplifications of the GloBE Rules.

• Extension of the Transitional CbCR Safe Harbour
  The Transitional CbCR Safe Harbour is extended by one year to cover fiscal years beginning on or before 31 December 2027 (but not including any fiscal year ending after 30 June 2029). This safe harbour allows MNE Groups to use simplified calculations based on Country-by-Country Reporting (CbCR) data to determine whether the Top-up Tax can be treated as zero, instead of performing full GloBE calculations. To qualify, the jurisdictional effective tax rate under the CbCR-based calculation must meet a 17% threshold for fiscal year 2026.

• Simplified ETR Safe Harbour
  This permanent Simplified ETR Safe Harbour allows MNE Groups to simplify compliance by calculating a jurisdictional effective tax rate using financial reporting data. The Simplified Income and Simplified Taxes for a Tested Jurisdiction are calculated based on the financial accounting data used to prepare the MNE Group’s Consolidated Financial Statement (CFS) consistent with the principles Article 3.1.2 and 3.1.3 of the GloBE Rules. If the Simplified ETR is at least 15%, the Top-up Tax is deemed zero, eliminating the need for full GloBE calculations. The safe harbour will generally apply for fiscal years beginning on or after 31 December 2026. Jurisdictions may, on certain conditions, elect early adoption for fiscal years beginning on or after 31 December 2025.

• Substance-based Tax Incentive Safe Harbour
  This safe harbour allows MNE Groups to include certain qualified, substance-based tax incentives (Qualified Tax Incentives, QTIs) as an addition to the Adjusted Covered Taxes in a jurisdiction. QTIs can be either expenditure-based or production-based incentives, and the amount that can be included is limited by a “Substance Cap” tied to payroll costs and the value of tangible assets in the jurisdiction. The safe harbour eliminates the Top-up Tax that would otherwise be attributable to these incentives. The Norwegian tonnage tax regime is not considered a Qualified Tax Incentive under the safe harbour.

Key takeaway

The Side-by-Side Package is a practical tool to protect the global minimum tax, helping the system run smoothly, reduce conflict, and lower compliance risk for affected groups. Companies should review the guidance and check how it affects their Pillar Two exposure and obligations.

We will continue to follow developments in Pillar Two and provide updates on any important changes.