Pillar Two side-by-side package released by OECD and what this means

In summary

• The OECD’s side-by-side package introduces new and enhanced safe harbours to simplify compliance while maintaining the 15% global minimum tax framework
• A permanent simplified ETR safe harbour and extended transitional CbCR safe harbour reduce the need for detailed GloBE calculations where thresholds are met
• The substance-based tax incentive safe harbour helps preserve the value of qualifying incentives by reducing. or eliminating, associated top-up tax liabilities
• The side-by-side system offers potential relief for qualifying groups, signalling increased standardisation and a continued focus on reducing global compliance and administrative burdens

Pillar Two is the OECD’s global minimum tax framework. It is designed to ensure that in-scope multi-national enterprises (MNEs) pay a minimum level effective tax rate (ETR) of 15%  in each jurisdiction they operate in. If the conditions for an applicable safe harbour are met, the MNE group may be relieved from performing the full GloBE ETR and top-up tax calculations for that jurisdiction, and the top-up tax for that jurisdiction may be treated as zero for the relevant period.

In January 2026, the OECD inclusive framework released a Pillar Two side-by-side package, with a number of new and extended safe harbours:

• A permanent new simplified effective tax rate safe harbour
• A temporary extension of the transitional country-by-country safe harbour
• A new substance-based tax incentive safe harbour
• A side-by-side system 

The introduction of this safe harbour aims to reduce the compliance burden associated with the global minimum tax. This safe harbour will be available to all multi-national enterprises in all jurisdictions from the beginning of 2027, or the beginning of 2026 in specific circumstances. This is dependent on each country’s implementation.  

The simplified ETR calculation takes the simplified taxes divided by simplified income.

Where a tested jurisdiction has a simplified ETR of 15% or more, or if the jurisdiction reports a simplified loss, the top-up tax is deemed to be zero for that year, and no detailed global anti-base erosion (GloBE) calculations are required.

These calculations will rely on the financial accounting data used by the MNE group to prepare the consolidated financial statements, and will minimise the number of adjustments compared to the full GloBE computations. In most cases, MNE groups will use the financial date from the preparation of the ultimate parent entity’s (UPE) consolidated financial statements.

The "once out, always out" rule that applies for the transitional country-by-country report (CbCR) safe harbour does not apply to the simplified ETR safe harbour.

The simplified ETR is calculated as: simplified ETR = simplified taxes/simplified income, where: 

• Simplified taxes are the adjusted current and deferred income tax expense for the jurisdiction
• Simplified income is the adjusted jurisdictional profit (or loss) before income tax

The transitional CbCR safe harbour has been extended to fiscal years beginning on or before 31 December 2027 but not ending after 30 June 2029, with the ETR threshold remaining at 17%.

During the transition period, taxpayers in scope have the choice of opting for the simplified ETR safe harbour or the transitional CbCR safe harbour.

This is an elective safe harbour and can be made for a fiscal year that commences on or after 1 January 2026. It can either reduce or eliminate top-up tax in a tested jurisdiction, resulting from certain qualified tax incentives (QTIs) connected to economic substance in the particular jurisdiction.

The SBTI safe harbour applies by reducing the top-up tax payable in a jurisdiction where, and to the extent that, the top-up tax is attributable to the use of QTIs in that jurisdiction.

It allows an MNE group to treat certain QTIs as an addition to its adjusted covered taxes for the ETR calculation. The adjusted amount is the lower of the QTI used in the fiscal year and the substance cap.

This increase in covered taxes can raise the ETR, potentially eliminating or reducing any top-up tax liability that would otherwise negate the incentive.

The substance cap is equal to greater of:

• 5.5% of payroll costs
• Depreciation of tangible assets in the jurisdiction 

Alternatively, the MNE group can elect to use an alternative cap that is equal to 1% of the carrying value of tangible assets in the jurisdiction.

A QTI is an incentive generally available to taxpayers and 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 are not included in GloBE income. 

This new framework consists of two safe harbours that provide relief from Pillar Two top-up taxes for MNE groups headquartered in a jurisdiction with strong minimum tax regimes It substantially reduces compliance and administrative burdens.

This safe harbour is available to a MNE group whose ultimate parent entity is in a jurisdiction with a qualified side-by-side regime.

To qualify for the side-by-side regime, a jurisdiction must:

• Be an eligible domestic tax system
• Be an eligible worldwide tax system
• Provide a foreign tax credit for qualifying domestic minimum top-up tax (QDMTT) on the same terms as any other creditable covered tax
• Have enacted its eligible domestic tax system and eligible worldwide tax system prior to 1 January 2026

Upon request by a member jurisdiction, the inclusive framework will assess that jurisdiction’s pre-existing tax regimes against the eligibility criteria for a qualified SbS or UPE regime by the end of the first half of 2026. 

All MNE groups (including those eligible for SbS or UPE safe harbours) remain subject to the QDMTT rules. 

This safe harbour replaces the transitional undertaxed profits rule (UTPR) safe harbour that expired at the end of 2025 and applies for financial years commencing on or after 1 January 2026.

This safe harbour is available to an MNE group whose UPE is located in a jurisdiction with a qualified UPE Regime.  A jurisdiction has a qualified UPE regime if it has an eligible domestic tax system that was enacted and in effect as at 1 January 2026. The conditions for this are the same as those outlined above for an eligible domestic tax system.

When an MNE group has made an election, the top-up tax is deemed to be zero for UTPR purposes in respect of the profits of constituent entities located in the UPE's jurisdiction.

The application of the income inclusion rule (IIR) and UTPR are unaffected by an MNE group having a UPE located in a jurisdiction without a qualified UPE regime.  

When the inclusive framework has determined that a jurisdiction has a qualified SbS or UPE regime, the jurisdiction will be listed as such in the central record.

Whilst the UK has not enacted the safe harbour rules yet, it will be important to monitor how other jurisdictions would implement the new safe harbour rules.  

The UK government has indicated its intention to adopt these rules in the next Finance Bill, following a technical consultation, with some changes applying for accounting periods beginning on or after 1 January 2026.

As always, if you would like to discuss any of the above, please do get in touch with your usual contact or one of the contacts listed.

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