On 28 June 2025, the G7, under Canada's presidency, released a joint statement announcing a new "side-by-side system" approach to the Organisation for Economic Co-operation and Development's (OECD's) Pillar Two framework. (See also EY Global Tax Alert, G7 issues statement on global minimum taxes, dated 9 July 2025.)

This announcement follows various discussions over United States (US) concerns regarding the Pillar Two rules and other perceived "unfair foreign taxes," which had culminated in proposed US Internal Revenue Code (IRC) Section 899 of the One Big, Beautiful Bill Act (OBBBA, H.R. 1). Proposed IRC Section 899 would have imposed US tax measures on certain foreign-parented groups and investors resident in countries with "unfair foreign taxes" (as therein defined), such as digital services taxes (DSTs) and undertaxed profits rules (UTPRs). (For more information, see EY Global Tax Alert, Canada's DST may trigger proposed US IRC Section 899, dated 5 June 2025, for the potential impact on Canada of proposed IRC Section 899.)

The G7 statement stated that the removal of section 899 is crucial. Notably, the proposed IRC section was omitted from the US Senate-released substitute amendment to the House-passed OBBBA on 28 June 2025, which included tax changes relative to the 16 June US Senate Finance Committee package. (For background, see EY Tax Alert, United States | Senate Finance Committee version of tax reconciliation bill adds new international proposals, modifies other proposals in House-passed bill, dated 23 June 2025.)

Concurrently, Canada has announced it will rescind the Digital Services Tax Act (the Act) to facilitate broader trade negotiations with the US. As a result, the planned 30 June 2025 collection of the DST has been halted, and legislation to formally rescind the Act is expected shortly. (For more information on Canada's DST, see EY Global Tax Alert, Canada | Preparing for digital services tax filing and payment obligations, dated 15 May 2025.)

As noted in the G7 statement on global minimum taxes, the delivery of a side-by-side system would facilitate further progress to stabilize the international tax system, including a constructive dialogue on the taxation of the digital economy and on preserving the tax sovereignty of all jurisdictions.

While the full scope of the side-by-side system remains to be clarified, key takeaways to date include:

• No immediate changes for any multinational enterprise (MNE) groups, including Canadian-headquartered MNEs. In addition, it appears that once the new side-by-side system is implemented, Canadian-headquartered MNEs could continue to be fully subject to the Global Minimum Tax Act.
• Exemption for US-headquartered MNE groups: Under the side-by-side system, the income inclusion rule (IIR) and the UTPR would no longer apply to US-parented groups, with regard to both domestic and foreign profits (e.g., profits of controlled foreign corporations). Based on the G-7 statement, it appears that:
• This exemption appears limited to US-ultimate-parent entities.
• Qualified domestic minimum top-up taxes remain applicable.
• There is no indication that US subsidiaries of Canadian MNE groups will benefit from the IIR exemption.
• Tax credit treatment under review: The G7 statement signals a reassessment of the treatment of substance-based nonrefundable tax credits to better align with refundable credits.

It is important to note that the G7 statement does not yet constitute enacted or substantively enacted legislation for financial reporting purposes. Further clarity is expected through OECD Administrative Guidance and domestic legislative processes.