16 January 2026 OECD releases Side-by-Side Package on Pillar Two Global Minimum Tax: Detailed review
On 5 January 2026, the Organisation for Economic Co-operation and Development (OECD) announced a political and technical agreement by the Inclusive Framework on a comprehensive package for a "side-by-side arrangement" (the Package). The Package, which is in the form of Administrative Guidance, includes a new Simplified Effective Tax Rate (ETR) Safe Harbour, a one-year extension of the Transitional Country-by-Country Reporting (CbCR) Safe Harbour, a new Substance-based Tax Incentive Safe Harbour and two Safe Harbours related to a Side-by-Side System. This Administrative Guidance will be incorporated into the Commentary to the Global Anti-Base Erosion (GloBE) Model Rules. The Simplified ETR Safe Harbour will be applicable as of 2027 (and in certain circumstances as of 2026 in jurisdictions that so choose) and is intended to provide compliance simplifications for businesses and tax authorities. The Transitional CbCR Safe Harbour is extended by one year, to include 2027. The Substance-based Tax Incentive Safe Harbour allows a Multinational Enterprise (MNE) Group to treat Qualified Tax Incentives as an addition to the Covered Taxes of the Constituent Entities located in the jurisdiction, which allows MNE Groups that have the required economic substance connections to the jurisdiction to benefit from certain tax incentives. The election can be made on a jurisdictional basis as of 2026. The Side-by-Side (SbS) Safe Harbour provides that MNE Groups with an Ultimate Parent Entity (UPE) in a jurisdiction with a Qualified SbS Regime will not be subject to the Income Inclusion Rule (IIR) or Undertaxed Profits Rule (UTPR) if they elect the SbS Safe Harbour. These MNE Groups will remain subject to Qualified Domestic Minimum Top-up Taxes (QDMTTs). To date, the United States (US) is the only jurisdiction that has been identified in the Central Record of Legislation with Qualified Status as having a Qualified SbS Regime, with the SbS Safe Harbour applicable to the US as of 2026. This new safe harbor does not affect the application of the Pillar Two rules to MNE Groups with a UPE in the US in 2024 and 2025. 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. Such an MNE Group that elects the UPE Safe Harbour will not be subject to the UTPR in respect of the profits located in the UPE jurisdiction. Member jurisdictions of the Inclusive Framework that have incorporated Pillar Two rules in their domestic legislation have committed to implement the safe harbors reflected in the Package. The process and timing for implementation will depend on a jurisdiction's domestic systems. The Package indicates that the Inclusive Framework will continue working on further simplifications, including for the application of the GloBE Model Rules, as well as on integrity rules and guidance on technical issues. It also notes plans for a stocktake regarding the effect of the global minimum tax rules by 2029. Click here for information on accessing the Global EY webcast on these latest Pillar Two developments that aired on 12 January 2026. In October 2021, the OECD released a statement reflecting the high-level agreement of Inclusive Framework member jurisdictions on core design elements of Pillars One and Two of the Base Erosion and Profit Shifting (BEPS) 2.0 project. (See EY Global Tax Alert, OECD releases statement updating July conceptual agreement on BEPS 2.0 project, dated 11 October 2021.) Since the October 2021 agreement was reached, the OECD has released a series of significant documents agreed by the Inclusive Framework on the Global Minimum Tax under Pillar Two, including:
The OECD has periodically updated the Commentary to incorporate the agreed Administrative Guidance, releasing Consolidated Commentary to the GloBE Model Rules in April 2024 (which incorporates the three tranches of Administrative Guidance that were issued before the end of 2023) and in May 2025 (which incorporates all the tranches of Administrative Guidance that were issued by the end of March 2025). In addition, in June 2024, the OECD released a Question & Answer (Q&A) document providing information regarding the peer review process for determining the qualified status of the elements of the Global Minimum Tax that are implemented by jurisdictions. (See EY Global Tax Alert, OECD/G20 Inclusive Framework releases documents on Pillar One Amount B and Pillar Two, dated 20 June 2024.) In January 2025, the OECD released a Central Record of Legislation with Transitional Qualified Status, listing the jurisdictions that had completed the transitional qualification mechanism process for the IIR, the Domestic Minimum Top-up Tax (DMTT) or the QDMTT Safe Harbour, together with explanatory information (including an update to the Q&A document on the process for determining qualified status). (See EY Global Tax Alert, OECD releases new documents on GloBE rules and on qualified jurisdiction status, dated 17 January 2025.) The OECD has periodically updated the Central Record of Legislation with Transitional Qualified Status. On 5 January 2026, the OECD announced a political and technical agreement by the Inclusive Framework on a comprehensive package for a "side by side arrangement" with respect to the Pillar Two global minimum tax. The Package is in the form of Administrative Guidance that will be incorporated into the Commentary to the GloBE Model Rules. On 13 January 2026, the OECD Secretariat discussed the Package on a webinar, Global minimum tax: Understanding the Side-by-Side package, which is available for replay. The Package states that the introduction of a permanent Simplified ETR Safe Harbour seeks to address a key concern of the business community by substantially reducing the compliance burden associated with the global minimum tax. Under this safe harbor, an MNE Group's ETR is determined under a simplified calculation based on the income and taxes from the MNE Group's financial reporting packages, with certain adjustments. If the Tested Jurisdiction has a Simplified ETR of at least 15%, the Top-up Tax is deemed to be zero, and no detailed GloBE calculations need to be made. The Simplified ETR Safe Harbour replaces the existing Transitional CbCR Safe Harbour (TCSH). The OECD is also working on a permanent safe harbor for other low-risk situations from a GloBE perspective, containing a permanent "de minimis" test and a "routine profits test" which appears to align to similar tests included in the TCSH. The work on this safe harbor is scheduled to be concluded in the first half of 2026. Further simplifications for Investment Entities and Minority-Owned Constituent Entities are also planned. The Inclusive Framework will monitor whether any refinements are needed to address any integrity concerns. In particular, the Inclusive Framework will develop an anti-arbitrage rule that would apply under the main rules and any safe harbor. This rule would prevent MNE Groups entering into arrangements to avoid Top-up Tax by shifting GloBE Income and Covered Taxes between jurisdictions. A Filing Constituent Entity may make an annual election as a result of which the Top-up Tax under the IIR, UTPR and QDMTT in a Tested Jurisdiction will be deemed to be zero for that Fiscal Year provided that either:
This computation is made on a jurisdictional basis and should include all entities that are located in the same jurisdiction in line with Article 10.3 of the GloBE Model Rules. Groups of Constituent Entities for which a separate ETR calculation is required under the GloBE Model Rules, such as members of a JV Group, are treated as a separate Tested Jurisdiction. One area in which this new Safe Harbour deviates from the GloBE rules relates to Investment Entities, which may — subject to conditions being met and the MNE Group making the election to do so — be considered as resident in the same jurisdiction for the simplified ETR Safe Harbour as regular Constituent Entities of the group. Generally, the same source of information used for the full GloBE computation should be used for the Simplified ETR computation — meaning the financial accounting data used to prepare the MNE Group's Consolidated Financial Statement (CFS) as defined in Articles 3.1.2 and 3.1.3 of the GloBE Model Rules. However, if a QDMTT jurisdiction has adopted the Local Financial Accounting Standard (LFAS) rule and an MNE Group is required to apply the local financial accounting standard for QDMTT computations, the MNE Group must compute the Simplified Income or Loss and Simplified Taxes for that Tested Jurisdiction using the financial accounts prepared under the LFAS rule (unless the QDMTT LFAS jurisdiction allows the use of the accounting standard of the group's Consolidated Financial Statements for purposes of the Simplified ETR Safe Harbour). One key departure from the GloBE rules is that Simplified Income or Loss and Simplified Taxes may be determined on an aggregated jurisdictional basis, rather than on an entity-by-entity basis. Depending on how an MNE's accounting data collection system is set up, this may provide simplification. Similar to GloBE Income or Loss, the Simplified Income or Loss of a Tested Jurisdiction is calculated by determining the Jurisdictional Profit (or Loss) before Income Tax, followed by making several adjustments. Most of these adjustments have a similar adjustment under the GloBE rules — and many contain an explicit reference to their counterpart in the GloBE Model Rules. The Simplified ETR Safe Harbour requires more adjustments than the TCSH, which bring the computation closer to the GloBE computation. The adjustments are categorized as Basic, Industry, Conditional and Optional adjustments, described below. The Jurisdictional Profit (or Loss) before Income Tax (JPBT) of a Tested Jurisdiction is equal to the aggregated Financial Accounting Net Income or Loss (FANIL, with the same meaning as under the GloBE rules) of the Constituent Entities in the Tested Jurisdiction plus the sum of the current and deferred income tax expense or benefit accrued in the FANIL of the Constituent Entities located in the Tested Jurisdiction. Consolidation adjustments relating to elimination of intragroup transactions must be reversed, except for transactions that are between Constituent Entities located in the same Tested Jurisdiction where an election under Article 3.2.8 of the GloBE Model Rules (the election to use consolidated data) is made. Similarly, Purchase Price Allocation adjustments must be reversed, unless the M&A Simplification applies (see below).
In addition to the Basic Adjustments, specific adjustments relevant for the financial services industry and for the international shipping industry align the calculation of the income under the safe harbor with the specific industry rules in the GloBE Model Rules.
The Shipping Industry Adjustments mirror the exclusion under Article 3.3 of International Shipping Income and Qualified Ancillary International Shipping Income from JPBT. A Five-Year Election is available to not apply the exclusion in Fiscal Years in which the computation of the aggregate amount of International Shipping Income and Qualified Ancillary International Shipping Income is positive. The calculation includes a conditional adjustment for amounts recorded directly in equity or Other Comprehensive Income (OCI) rather than in the profit and loss (P&L) statement. The items subject to these adjustments are Included Revaluation Method Gain or Losses (Article 3.2.1(d) of the GloBE Model Rules) and Prior Period Errors and Changes in Accounting Principle (Article 3.2.1(h) of the GloBE Model Rules). Under the Simplified ETR Safe Harbour, the general rule is that negative-equity reported items (i.e., losses or expenses) do not require any adjustment. For positive-equity reported items (i.e., income), an adjustment is required unless two conditions are met:
If these conditions are met, the adjustment is waived because including the income and its matching tax would not move the Simplified ETR above the Minimum Rate and the rules ensure that equity reported income that is untaxed or insufficiently taxed is still brought into the Simplified Income calculation to prevent the risk that the Simplified ETR would be overstated. The rules also include rules to address corporate restructurings. If the conditions apply, an MNE will not need to adjust for Purchase Price Accounting push-down — unless goodwill is impaired or amortized without a corresponding deferred tax liability. This is different from the GloBE Model Rules. The Simplified ETR Safe Harbour also includes an election reflecting Article 6.3.4 of the GloBE Model Rules, which allows qualifying gains to be spread over five years. Finally, the Simplified ETR Safe Harbour provides for several optional adjustments in the form of GloBE Elective Adjustments and Optional Exclusions. All the elections available under Chapter 3 of the GloBE Model Rules are also available for the Simplified ETR computation. If a Five-Year Election is made, either under the GloBE Model Rules or under the Simplified ETR Safe Harbour, an MNE Group will need to apply the election in subsequent years both under the GloBE Model Rules and the Safe Harbour until the election is revoked. This is intended to provide continuity. The Simplified ETR Safe Harbour's Optional Exclusions are GloBE adjustments that are required under the Safe Harbour unless an MNE Group opts out of them for Safe Harbour purposes. These relate to the Asymmetric Foreign Exchange Currency Gain or Loss (Article 3.2.1(f) of the GloBE Model Rules) and Accrued Pension Expense (Article 3.2.1(i) of the Globe Model Rules). The election to opt out is a Five-Year Election. The starting point for the determination of the Simplified Taxes for a Tested Jurisdiction is the Jurisdictional Income Tax Expense (JITE). This amount is equal to the sum of the current and deferred income tax expense or benefit accrued in the FANIL of the Constituent Entities located in the Tested Jurisdiction, as well as deferred taxes recorded at the consolidated level that are attributable to Constituent Entities in the Tested Jurisdiction. In addition, if income and expense attributable to purchase price allocation (PPA) accounting is reflected in the financial accounts used to calculate the JPBT and the M&A Simplification applies, the JITE will include deferred taxes attributable to PPA accounting for the M&A Transaction. The JITE is adjusted to remove any amount that is not a Covered Tax (as defined in Article 4.2.1 of the GloBE Model Rules). The MNE Group may also elect to add any amount of Covered Taxes that was not treated as an income tax expense in the financial accounts pursuant to Article 4.1.2(a). The JITE is then adjusted for refunds and credits where necessary to align it with Article 4.1.3(b) and (c). Similar to Articles 4.1.3(a) and 4.4.1(a) of the GloBE Model Rules, the JITE is adjusted to exclude any tax expense with respect to income that is not included in Simplified Income. However, no positive adjustment is made to JITE if an amount of expense or loss is excluded from Simplified Income. In line with Articles 4.1.2(c), 4.1.3(d), 4.4.6 and 4.1.3(e) of the GloBE Model Rules, JITE excludes tax expenses arising from the accrual or reversal of an uncertain tax position and Disallowed Accrual, as well as current tax expenses not expected to be paid within 3 years. In line with Articles 4.4.1(c) and 4.4.2(c) of the GloBE Model Rules, the impact of valuation allowances or accounting recognition adjustments is ignored for JITE purposes. This adjustment had not been included in the TCSH. The additional or lower net amount of deferred tax expense resulting from a tax rate change that occurs above 15% are excluded from JITE in line with Article 4.4.1(d) of the GloBE Model Rules. Effects of rate changes from below 15% to above 15% or vice versa are treated in accordance with the simplified methodology for tax adjustments after year-end as described below. Deferred taxes relating to generation and use of tax credits are excluded from JITE, in line with Article 4.4.1(e) of the GloBE Model Rules. Finally, deferred tax liabilities that are not a Recapture Exception Accrual (such as deferred taxes related to indefinite life intangibles) are generally excluded from JITE (with two exceptions to this main rule). Contrary to the GloBE rules under which each deferred tax asset and liability is recast separately and the deferred tax expense for the jurisdiction is computed based on the recast deferred tax assets and liabilities, the Simplified ETR Safe Harbour recasts to 15% the net deferred tax expense that goes into Simplified Taxes if it was accrued at a rate above the Minimum Rate. However, in jurisdictions for which different rates and/or bases are applied, the MNE Group must recast those taxes using a methodology that is consistent with the deferred tax recasting principles of the GloBE Model Rules. The Package notes that the Inclusive Framework will consider providing more detailed guidance both under the GloBE Model Rules and the Simplified ETR Safe Harbour on the computation and the recasting of deferred tax expenses for such situations. The Simplified ETR Safe Harbour contains a rule akin to the Excess Negative Tax Carry-forward rule under the GloBE rules, called "Simplified Adjustment for Negative Taxes." If an MNE Group has negative taxes when computing its JITE, the negative taxes will be carried forward to the following years and reduce the tax amount of such years when calculating the Simplified ETR. An election is available — the Loss DTA Adjustment — to opt out of the above rule for negative taxes during a transition period of five years, starting with the Transition Year, which is the first year the GloBE Model Rules or the Simplified ETR Safe Harbour is applicable. The Loss DTA Adjustment is the amount of tax that relates to permanent differences and deferred taxes that relate to indefinite life intangibles. It is carried forward and reduces the amount of the tax expense related to losses computed in the Simplified Taxes. Continuity rules apply for years in which the Simplified ETR Safe Harbour is no longer applied. The rules also contain optional elections that complement the income-side options by specifying when and how tax amounts can be included or adjusted to maintain symmetry and avoid distortions. An Annual Election can be made to include in Simplified Taxes any Covered Taxes that were accrued as an expense but not recorded as income tax expense. This is useful if certain covered tax charges are booked in other lines of the P&L statement or directly in equity/OCI and ensures the numerator appropriately captures taxes tied to the income that is in scope for the safe harbor. If equity reported items of income (e.g., amounts originally recorded in equity or OCI) have been brought into Simplified Income, an Annual Election allows an MNE Group to include the corresponding Covered Taxes in Simplified Taxes. This maintains symmetry when the income is reflected in the denominator of the ETR calculation. An Annual Election allows an MNE Group to add back eligible Qualified Refundable Tax Credits (QRTCs) or a Marketable Transferable Tax Credits (MTTCs) to Simplified Taxes and simultaneously include a corresponding amount in Simplified Income — both for credits originating in the election year and for unused balances from prior years until fully utilized. The Substance Based Tax Incentive (SBTI) Safe Harbour can be elected. This increases Adjusted Covered Taxes by Qualified Tax Incentives up to a Substance Cap. The SBTI Safe Harbour is also available under the GloBE Model Rules and is further described below. The GloBE Loss Election (Article 4.5 of the GloBE Model Rules) is also available under the Simplified ETR Safe Harbour, letting taxpayers carry forward GloBE losses via a deemed DTA framework. The GloBE Model Rules contain a number of transition rules that apply the first year a jurisdiction falls within the scope of the full rules (e.g., when the TCSH no longer applies). As the Simplified ETR Safe Harbour does not delay the Transition Year, the rules in Articles 9.1.1, 9.1.2 and 9.1.3 of the GloBE Model Rules apply to the earlier of the Transition Year otherwise determined under the GloBE Model Rules and Commentary and the first Fiscal Year that the MNE Group elects to apply the Simplified ETR Safe Harbour for that jurisdiction. Questions have come up in relation to the GloBE rules regarding how to address post year-end adjustments. The GloBE rules only contain limited guidance on how to address very common scenarios — such as true-ups. The Simplified ETR Safe Harbour contains specific rules aiming simplification that handle changes to Covered Taxes or income that occur after the Fiscal Year has ended, such as true ups, amended assessments, late adjustments or transfer pricing corrections. The overarching principle is that instead of restating the effective tax rate for prior years to which the adjustment relates, most adjustments are taken into account in the accrual year — the year in which the adjustment is reflected in the financial accounts. However, a Five-Year Election is available that allows taxpayers to include increases or decreases in Covered Taxes (and the related income) in the Simplified Taxes of the transaction year, provided the adjustment accrues within 12 months of that year-end. This election does not apply to transfer pricing adjustments, which are subject to specific rules. Electing this option provides flexibility for taxpayers whose tax or income assessments are regularly finalized shortly after the reporting period, allowing alignment between the original transaction year and the related tax outcome. For tax adjustments that occur more than 12 months after the end of the transaction year, the safe harbor maintains the default rule that they are included in the accrual year. However, for large reductions in Covered Taxes, in which including a refund in the accrual year could reduce the Simplified ETR below the Minimum Rate, the MNE Group may apply an exception that allows the refund to be added back to Simplified Taxes in the accrual year if the year to which the refund relates qualifies as a Qualified Refund Year. A year is considered a Qualified Refund Year if, after adjusting the prior year's Simplified Taxes (or GloBE Adjusted Covered Taxes, for years not under the safe harbor), the ETR for that prior year would still meet or exceed the Minimum Rate. The Simplified ETR Safe Harbour mirrors the cross border allocation rules for income and taxes of a Permanent Establishment (PE) and a Flow-Through Entity under Article 3.4, 3.5 and 4.3.2(b) of the GloBE Model Rules. The tax amount allocable from a Main Entity to a PE or from a Constituent Entity-owner to a subsidiary Constituent Entity under Article 4.3.2(a), (c), (d) or (e) is excluded from all Tested Jurisdictions, unless the MNE Group makes the Five-Year Election. Withholding taxes imposed on distributions from a Constituent Entity by the jurisdiction where that subsidiary Constituent Entity is located are not excluded. A PE Simplification Election is available when the Main Entity is located in a jurisdiction that has anti-hybrid rules consistent with BEPS Action 2 and operates a taxable branch regime. The effect of the simplification is that for the calculation of the ETR in the Main Entity's jurisdiction, income and taxes related to the PE can form part of the Main Entity's Simplified Income and Simplified Taxes. For the Simplified Income, this applies provided and to the extent that the PE's income is included in the domestic taxable income of the Main Entity's jurisdiction. The Main Entity's current and deferred taxes in respect of the PE's income are included in the Simplified Taxes of the Main Entity's jurisdiction. If the PE Simplification Election is made, the group shall treat foreign tax credits used by the Main Entity in relation PE income as Simplified Taxes (subject to certain conditions and adjustments). The election is annual, but once a loss from a PE is included in the Main Entity's jurisdiction, the group must continue the election until the loss is fully "recaptured" through an equivalent amount of positive income. The PE Simplification Election has no impact on the Simplified ETR Safe Harbour computation of the PE's Tested Jurisdiction. The Simplified ETR Safe Harbour computations for those Tested Jurisdictions mirror the QDMTT approach and an MNE Group must exclude any taxes paid by a Main Entity on income attributable to a PE from the Simplified ETR computation for the Tested Jurisdiction of the PE, unless a Five-Year Election is made. Under this election, allocation of taxes for PEs, Controlled Foreign Companies, Hybrid Entities and of taxes related to distributions are allocated in accordance with the GloBE Model Rules in Article 4.3.2 and 4.3.3. If those taxes are allocated to a Constituent Entity that is located in a jurisdiction that does not have a QDMTT, the taxes are included in the Simplified Taxes for the Tested Jurisdiction that includes that Constituent Entity. If the transfer price used on transactions between Constituent Entities located in different jurisdictions (or, in some cases, in the same jurisdiction) differs from the transfer price for corporate income tax purposes, the Simplified Income or Loss and Simplified Taxes should generally be based on the transfer price for corporate income tax purposes. The Simplified ETR Safe Harbour also applies this to TP taxable income adjustments made within 12 months of the end of the financial year. In such case, the adjustments shall be made in both relevant Constituent Entities. Alternatively, an MNE Group may make a Five-Year Election to include TP taxable income adjustments in the year in which such adjustments are made. If transactions between Constituent Entities located in different jurisdictions are accounted at cost, the JPBT of the seller jurisdiction should be adjusted to reflect the transaction price used for corporate income tax purposes (or the price consistent with the Arm's-Length Principle, if the transaction is not taxable). If the transaction is related to intangible assets, the Simplified Income and the Simplified Taxes of the purchaser jurisdiction shall also be calculated using that value. For transactions not involving intangible assets, the Simplified Income of the buyer shall be calculated based on the carrying value in the financial accounts and the Simplified Taxes shall be calculated after taking into account a DTA (recast at the Minimum Rate) in respect of the difference between tax and accounting carrying values. The Simplified ETR Safe Harbour has separate provisions for tax-neutral UPEs, such as flow-through UPEs or UPEs that operate under a Deductible Dividend Regime. In these cases, the rules require reducing the Simplified Income, Simplified Loss and Simplified Taxes following the special allocation rules in Articles 7.1 and 7.2 of the GloBE Model Rules. If all ownership interests in such a UPE are held by Qualified Persons, and (in the case of Deductible Dividend Regimes) all income is distributed as deductible dividends, the safe harbor simplifies the treatment by deeming both Simplified Income and Simplified Taxes to be zero without requiring a calculation of the Simplified Income and Simplified Taxes. When the income and taxes of all entities in the jurisdiction is reduced to zero because of these rules, the Group can apply the Simplified ETR Safe Harbour for that jurisdiction. If the conditions for this simplification are not met (e.g., because not all owners are Qualified Persons, not all income is distributed or Articles 7.1 and 7.2 do not apply to all Constituent Entities in the jurisdiction), the Tested Jurisdiction's Simplified ETR is then determined based on the remaining income and tax. A Tax Transparent Entity that is not a UPE is regarded as stateless under the GloBE Model Rules. If all the income and taxes of such Entity are (a) allocated to PEs or Constituent Entity-owners or (b) excluded as allocated to non-Group Entities, the Tax Transparent Entity shall have no Simplified Income or Loss and Simplified Taxes. In this situation, the Tax Transparent Entity can benefit from the Simplified ETR Safe Harbour. If not all the income and taxes of a stateless Tax Transparent Entity can be allocated or excluded, the Simplified ETR Safe Harbour will not be available. The Simplified ETR Safe Harbour guidance specifies that if all Constituent Entity owners treat an Investment Entity or Insurance Investment Entity as tax transparent under either (a) an election under Article 7.5 of the GloBE Model Rules or (b) the general rules on Tax Transparent Entities in Article 10.2 of the GloBE Model Rules, the entity is also treated as a Tax Transparent Entity for the Simplified ETR Safe Harbour. In line with the discussion on Tax Transparent Entities above, these Entities can then benefit from the Simplified ETR Safe Harbour. This aims to simplify the compliance burden for investment structures where the income is already taxed at the Constituent Entity owner level. Except as explained above, the Simplified ETR Safe Harbour does not apply to Stateless Constituent Entities, Investment Entities and (with certain exceptions) Tested Jurisdictions with Constituent Entities in respect of which the MNE Group has made an Eligible Distribution Tax System election. The application of the Simplified ETR Safe Harbour requires that the MNE Group adjusts its Simplified Income and Simplified Taxes to ensure that it meets four integrity principles: (1) matching principle, requiring that corresponding income and expense are recognized for intragroup income (subject to an exception in case of use of Local Financial Accounting Standard); (2) full allocation principle, requiring that all income is allocated to a Tested Jurisdiction; (3) single expense and loss principle, requiring that all expenses and losses are deducted once and in only one Tested Jurisdiction; and (4) single tax principle, requiring that taxes are recorded only once and in only one Tested Jurisdiction. Similarly, any financial instruments between Constituent Entities must be classified as debt or equity consistently for both issuer and holder. The Simplified ETR Safe Harbour can only be applied for jurisdictions for which there was no Top-up Tax liability in respect of every Fiscal Year beginning within 24 months before the first day of the Fiscal Year for which the Simplified ETR Safe Harbour is elected. The "once out, always out" rule that applies for the Transitional CbCR Safe Harbour does not apply to the Simplified ETR Safe Harbour. As a result, the MNE Group under conditions can re-enter the Simplified ETR Safe Harbour. The election to apply the Simplified ETR Safe Harbour will be available for Fiscal Years beginning on or after 31 December 2026 (e.g., 2027 for calendar Fiscal Years), but jurisdictions may make the safe harbor available one year earlier if they choose to do so and if either (a) only one jurisdiction has taxing right or (b) all jurisdictions with taxing rights allow the earlier application. Therefore, although this safe harbor is designed to replace the Simplified ETR Test in TCSH, in 2027 (and potentially in 2026) both safe harbors could be available. The Package includes an extension of the TCSH. This extension is intended to facilitate an orderly transition from the TCSH into the new Simplified ETR Safe Harbour. The TCSH will now apply to Fiscal Years beginning on or before 31 December 2027 (but not including a Fiscal Year that ends after 30 June 2029). For MNE Groups with a calendar Fiscal Year, this means the TCSH will be extended to 2027. The 17% transition rate that is applicable for Fiscal Years beginning in 2026 will also apply to Fiscal Years beginning in 2027. During the extended transition period, in-scope taxpayers may elect to apply either the new Simplified ETR Safe Harbour or the TCSH (subject to the once-out, always-out rule for the TCSH). This flexibility allows MNE Groups to select the approach that best fits their profile for each jurisdiction. In this regard, application of the TCSH affects the determination of the "Transition Year" (the first Fiscal Year in which the MNE Group comes within the scope of the GloBE Rules for a jurisdiction). This is particularly relevant for the application of the transition rules under Chapter 9 of the GloBE Model Rules. Tax credits, unless they are a QRTC or an MTTC, reduce Covered Taxes and, as a consequence, lower an entity's ETR, which may result in Top-up Tax. The SbS package agreed by the Inclusive Framework introduces a Substance-Based Tax Incentive (SBTI) Safe Harbour, allowing MNE Groups to treat certain Qualified Tax Incentives (QTIs) as an addition to Covered Taxes, thereby increasing the ETR. The SBTI Safe Harbour is an Annual Election that applies to all QTIs in a jurisdiction. The safe harbor is available for Fiscal Years starting on or after 1 January 2026. When the election is made, the Covered Taxes for the relevant jurisdiction are increased by the lower of the amount of QTIs used in the Fiscal Year and the Substance Cap for the Tested Jurisdiction. The relevant concepts are explained below. Unlike QRTCs or MTTCs, QTIs are not included in GloBE Income. As a result, treating an incentive as a QTI may offer greater benefits to an MNE Group compared to the treatment of QRTCs or MTTCs. To address this, an MNE Group may make an Annual Election to treat some or part of QRTCs or MTTCs as QTI, provided they meet the QTI definition. If this election is made, the QRTC or MTTC is excluded from GloBE Income and instead treated as a reduction to Covered Taxes (i.e., treated like a non-qualifying tax credit), before the QTI adjustment to increase Covered Taxes is applied in the same way as it applies to any other type of QTI. A QTI is an incentive that is generally available to taxpayers and is calculated based on expenditures incurred (expenditure-based tax incentive) or on the amount of tangible property produced (including production of electricity and processing such as extraction and refining) in the jurisdiction (production-based tax incentive). The definition excludes incentives that reduce the liability of a non-Covered Tax and incentives that apply only to expenditures incurred in connection with income excluded from GloBE Income, as well as subsidies or grants, even if they relate to the taxpayer's expenditure. It also excludes incentives that are not generally available, e.g. due to eligibility criteria being restricted to in-scope MNE groups or due to the requirement of a discretionary decision by Central Government. The Inclusive Framework is developing guidance to clarify when jurisdictional benefits reduce Covered Taxes and to identify "Related Benefits" linked to global minimum tax implementation. QTIs will be monitored to ensure they promote genuine economic activity, with Related Benefits excluded from QTI treatment. A qualifying expenditure-based tax incentive is defined as one providing tax relief as a proportion of qualifying expenses incurred, reducing the taxpayer's economic cost by a fixed and determinable amount. Because policies vary across jurisdictions, the QTI definition is broad and does not restrict eligibility by expense type, ensuring neutrality and avoiding complexity. Differences in how expenditure-based tax incentives are granted (e.g., as a credit against tax liability or through additional deductions) are not relevant in determining whether an incentive qualifies as a QTI. The critical requirement is that the incentive amount is directly calculated by reference to the expense incurred. Tax allowances for capital expenditure that only create timing differences are excluded from the QTI definition, as GloBE deferred tax rules already address these and prevent Top-up Tax arising from these incentives. However, if the incentives include super deductions or enhanced allowances that exclude income beyond the original investment, the excess creates a permanent difference similar to a tax credit or allowance and may qualify as an expenditure-based tax incentive. An expenditure-based tax incentive is excluded from QTI treatment if the value of the tax benefit exceeds the underlying expenditure incurred (upon which the amount of the incentive was calculated). This assessment considers all incentives related to the same expenditure. The value of a tax benefit equals the maximum reduction in tax liability — for a tax credit, the credit amount; for deductions, enhanced allowances or exemptions, the additional deduction or excluded income multiplied by the statutory tax rate. To qualify as QTI, a production-based tax incentive must be based on the volume of tangible goods produced in a jurisdiction measured by units. Unlike expenditure-based incentives, which grant relief in proportion to costs incurred, production-based incentives reward output by granting tax relief based on the volume of goods generated. When the election is made, the Covered Taxes for the relevant jurisdiction are increased by the lower of (a) the amount of QTIs used in the Fiscal Year or (b) the Substance Cap for the Tested Jurisdiction. When the QTI is a tax credit, the amount of QTIs used in the Fiscal Year is the amount of credit applied to reduce the Covered Tax liability during that period. The QTI adjustment is applied after the exclusion of deferred tax with respect to the generation and use of tax credits as per the GloBE Model Rules. As a result, any deferred tax expense related to the use of a tax credit remains excluded, but there may be a separate QTI adjustment to increase Covered Taxes. For super deductions, enhanced allowances or exemptions, the amount of QTIs used is calculated as the additional deduction or exempt income multiplied by the statutory tax rate. If these incentives create a tax loss, the full economic benefit arises when the loss is used in a later period. However, the QTI adjustment applies in the year that the incentive is claimed, reducing Additional Top-up Tax or Excess Negative Tax Carry Forward and improving outcomes when the loss is utilized. The Substance Cap limits allowances based on the substance measure developed under the Substance-based Income Exclusion (SBIE).
Option 2 requires a Five-Year Election. If revoked, assets previously included under this method must be excluded from depreciation/depletion calculations under Option 1 to prevent benefits resulting from switching after significant depreciation. The Package describes the SbS system as reflecting the Inclusive Framework's recognition that some jurisdictions may already have implemented tax regimes that impose minimum taxation on both the domestic and foreign income of MNE Groups headquartered in such jurisdictions, while also taking into account the success of QDMTTs and the commitment of Inclusive Framework member jurisdictions to address any potential BEPS or level-playing-field risks arising from the interaction between the existing GloBE regime and the new SbS system. The SbS system consists of the SbS Safe Harbour and the UPE Safe Harbour. If the UPE of an MNE Group is located in a jurisdiction with a "Qualified SbS Regime," the group may elect the SbS Safe Harbour. With that election, the Top-up Tax under the IIR and UTPR is deemed to be zero for all Constituent Entities in the Group, including Minority-owned Constituent Entities and Stateless Constituent Entities. This reduction of Top-up Tax to zero also will apply to an IIR that otherwise would be imposed at the level of an Intermediate Parent Entity (including a Partially-owned Parent Entity). The SbS Safe Harbour election applies to deem the Top-up Tax to be zero with respect an electing MNE Group's interests in a Joint Venture or a JV Subsidiary. The election does not affect the application of the IIR or UTPR to any other MNE Group's interest in the same Joint Venture or JV Subsidiary. The election also does not affect the Top-up Tax of an Entity that would otherwise be a Joint Venture of an MNE Group eligible for the SbS Safe Harbour but for the fact that it is a UPE of a separate MNE Group subject to the GloBE rules. The SbS Safe Harbour has no impact on QDMTTs; they remain fully applicable to the foreign operations of MNE Groups that have elected the SbS Safe Harbour. QDMTTs will continue to be calculated without taking into account Main Entity jurisdiction taxes imposed on PEs or taxes in respect of direct or indirect interests in a controlled foreign company. QDMTTs must be creditable under any Qualified SbS Regime, just as they are under the global minimum tax rules. Jurisdictions cannot allow an MNE Group to apply for the SbS Safe Harbour for purposes of their QDMTTs. The SbS Safe Harbour does not affect the application of the IIR or UTPR to any MNE Group with a UPE located in a jurisdiction that does not have a Qualified SbS Regime. For a UPE jurisdiction to have a Qualified SbS Regime, it must meet the eligibility criteria, which require: (1) an eligible domestic tax system, (2) an eligible worldwide tax system and (3) provision of a foreign tax credit for QDMTTs on the same terms as other creditable covered taxes. With respect to the foreign tax credit requirement, foreign tax credit limitations that are generally applicable may apply to the credit for QDMMTs. An eligible domestic tax system is one that meets the following three requirements. First, the jurisdiction's statutory nominal corporate income tax rate must be at least 20%, after making adjustments to the statutory rate to reflect any preferential adjustments that generally apply to all income of in-scope MNE Groups (e.g., a deduction, exclusion or tax credit). The rate may also take into account any applicable sub-national corporate income taxes. For this purpose, if there are different sub-national corporate income tax rates within a jurisdiction, the combined rate must be determined by reference to the sub-national jurisdiction with the lowest tax rate. Second, the jurisdiction must have either a QDMTT or a corporate alternative minimum tax based on financial statement income at a nominal rate of at least 15%. The corporate alternative minimum tax may be subject to appropriate adjustments and be offset by foreign or domestic tax credits, to the extent the adjustments and credits are consistent with the policy objectives of minimum taxation. Further, the corporate alternative minimum tax must be applicable to a substantial portion of the aggregate income of all in-scope MNE Groups' operations in the jurisdiction. This criterion does not require that a substantial portion of the net income of each individual in-scope MNE Group be subject to the corporate alternative minimum tax. Third, there must be no material risk that in-scope MNE Groups with their UPEs located in the jurisdiction will be subject to an effective tax rate below 15% on the aggregate profits of their domestic operations (rather than the profits of the domestic operations of each MNE Group). A risk is "material" if it is of such significant magnitude and likelihood that policymakers would foreseeably consider it as a basis for revising an applicable tax regime. This criterion is applied by considering the design and operation of the GloBE rules and making a pragmatic assessment of the overall operation of the applicable tax system. This criterion is considered holistically over time and at an aggregate level, rather than considering each MNE Group separately; it also may take into account any legislated regimes to address BEPS risks that are in place. An eligible worldwide tax system is one that meets the following three requirements. First, the system must be a comprehensive tax regime that is both applicable to the foreign income of all corporations and imposed on a tax base that is broad, is not subject to material exclusions, and includes both active and passive income of controlled foreign companies (regardless of whether the income is distributed). In this regard, there may be limited income exclusions that are consistent with the policy objectives of minimum taxation (e.g., excluding high-taxed income). A regime that excludes highly mobile income (such as royalty income), however, would not qualify as a comprehensive tax regime. Second, the system must incorporate appropriately targeted but substantial mechanisms addressing significant BEPS risks. For instance, this requirement may be met if a regime prevents foreign tax credits related to active income from being used to offset pre-credit tax liabilities arising from passive income. Likewise, a regime could satisfy this condition by requiring taxpayers to separately consider inclusions from controlled foreign companies that are subject to low taxation and those that are subject to high taxation. This second requirement will not be satisfied unless the regime has a mechanism to prevent foreign tax credits on high-tax active income from offsetting tax on low-tax passive income. Third, the system must not entail any material risk that in-scope MNE Groups headquartered in the jurisdiction will be subject to an effective tax rate of less than 15% on the profits of their collective foreign operations, taking into account the design and operation of the GloBE rules and the overall operation of the applicable tax system. Upon the request of a member jurisdiction, the Inclusive Framework will assess the jurisdiction's pre-existing tax regimes under the eligibility criteria for a Qualified SbS Regime by the end of first half of 2026. The Central Record of Legislation with Qualified Status was updated on the same date that the Package was released to reflect the United States as having a Qualified SbS Regime. As of the date of the publication of this Alert, the Central Record did not include any other jurisdictions as having a Qualified SBS Regime. In addition to the assessment of pre-existing regimes, if a member jurisdiction initiates a request during 2027 or 2028, the Inclusive Framework will assess the jurisdiction's then-existing regimes for eligibility as a Qualified SbS Regime. The SbS Safe Harbour is applicable for an MNE Group's Fiscal Years beginning on or after 1 January 2026, or a later year as listed in the Central Record. If a jurisdiction incorporates the SbS Safe Harbour into its domestic law after that date, it is expected to do so with retrospective effect. If a jurisdiction is prevented from applying the SbS Safe Harbour from 1 January 2026 due to constitutional constraints or other overriding legal requirements, it must implement the Safe Harbour as of the earliest practicable date. In that case, each UTPR jurisdiction, including those that have adopted the SbS Safe Harbour, would be taken into account in the application of the formula to allocate the UTPR Top-up Tax Amount (as set out in Article 2.6.1) and a jurisdiction that has not yet implemented the SbS Safe Harbour would not be allocated any more than its UTPR Percentage of the UTPR Top-up Tax Amount. Election of the SbS Safe Harbour will be made via the GloBE Information Return (GIR). Further revisions to the GIR will add a field to indicate the election is being made and to identify particular data points that might not be required for MNE groups that make the election. An MNE Group that makes the SbS Safe Harbour election in a jurisdiction with an IIR or UTPR will provide only the group information in Section 1 (MNE Group Information) other than Section 1.4 (High Level Summary of GloBE Information) of the GIR to that jurisdiction. The electing MNE Group will remain subject to the GIR filing obligations for QDMTT purposes, which generally will require providing to a QDMTT jurisdiction the group information in Section 1 (other than Section 1.4) and the jurisdictional information in Section 3 for that jurisdiction. A jurisdiction listed on the Central Record as having a Qualified SbS Regime is required to notify the Inclusive Framework of any material amendment to its regime within three months of the relevant change. For this purpose, an amendment is "material" if it could have foreseeably influenced an Inclusive Framework assessment on eligibility as a Qualified SbS Regime or a Qualified UPE Regime. Upon receiving a notification, the Inclusive Framework will consider the best path forward. The UPE Safe Harbour provides targeted relief for the UPE jurisdiction and effectively replaces the Transitional UTPR Safe Harbour, which expired at the end of 2025 for MNE Groups having a calendar Fiscal Year. A MNE Group with its UPE located in a jurisdiction with a Qualified UPE Regime may elect the UPE Safe Harbour, under which the Top-up Tax under the UTPR would be reduced to zero for all Constituent Entities located in the UPE jurisdiction. The UPE Safe Harbour does not affect the application of the IIR or UTPR with respect to any Constituent Entities that are located outside the UPE jurisdiction. It also does not have any impact on the operation of QDMTTs. A jurisdiction is considered to have a Qualified UPE Regime if it had in effect, as of 1 January 2026, an eligible domestic tax system. For this purpose, the requirements for an eligible domestic tax system are the same as the eligible domestic tax system criteria for a Qualified SbS Regime discussed above. Upon request by a member jurisdiction, the Inclusive Framework will assess the jurisdiction's pre-existing tax regimes against the eligibility criteria for a Qualified UPE Regime by the end of the first half of 2026. As of the date of the publication of this Alert, the Central Record of Legislation with Qualified Status did not include any jurisdictions considered to have a Qualified UPE Regime. Consistent with the SbS Safe Harbour, the UPE Safe Harbour is applicable for fiscal years beginning on or after 1 January 2026. The guidance regarding the effective date of the SbS Safe Harbour also applies to the UPE Safe Harbour. The GIR will be amended to include a field for an MNE Group to make the UPE Safe Harbour election. A jurisdiction that is listed in the Central Record as having a Qualified UPE Regime will be required to notify the Inclusive Framework if it materially amends that regime. The guidance regarding material changes to a Qualified SbS Regime also applies to this requirement. The Inclusive Framework will undertake a stocktake under an evidence-based objective process to be agreed by the Inclusive Framework, which is to be concluded by 2029. The stocktake will take into account data on the effect of the global minimum tax and the SbS system, including the level of QDMTT implementation. It will assess unintended effects, such as any emerging competitive imbalances identified between MNE Groups and any negative trends in taxpayer behavior aimed at achieving low-tax outcomes. The stocktake will consider all data that is relevant to making an informed judgment on the operation of the global minimum tax and its interplay with any Qualified SbS Regime or Qualified UPE Regime in light of the common policy objectives. Informed by the stocktake and to uphold the SbS agreement and its continued operation, the Inclusive Framework commits to take action to address any substantial identified risks to the level playing field or BEPS. The form of any action will depend on the common nature and materiality of any risks identified and an assessment of how the risks could be addressed in a way that preserves the policy objectives of the SbS system and the global minimum tax. Neither of the safe harbors agreed as part of the SbS system will prevent QDMTTs applying to the operation of all MNE Groups. QDMTTs will continue to be calculated without a pushdown of controlled foreign company or other owner-level taxes. In addition, all Inclusive Framework members remain committed to crediting QDMTTs on the same terms as any other creditable foreign income tax. The Inclusive Framework will continue with the work on reducing administrative burdens for jurisdictions and simplifying compliance for MNE Groups subject to the global minimum tax. This work will include identifying possible further coordination opportunities that could reduce the compliance burdens for MNE Groups with operations in QDMTT jurisdictions. The Package indicates that the Inclusive Framework agrees that conditional or discriminatory taxes will not be recognized as Covered Taxes and will consider further work on how this will be consistently applied. The qualified status of domestic minimum top-up taxes remains dependent on their consistent and non-discriminatory application to MNE Groups, regardless of whether an MNE Group has elected to apply the SbS Safe Harbour. In this regard, the Package references the role of peer review and ongoing monitoring in connection with the global minimum tax, including the work on Related Benefits. The Package also states that finalizing the work being on integrity measures will preserve the integral roles of QDMTTs by ensuring a minimum level of taxation and addressing any risk of competitive distortions. On Monday, 12 January 2026, the Official Journal of the European Union (EU) published a notice in which the European Commission acknowledged the Package and "confirms it application in the context of Council Directive (EU) 2022/2523" (the Minimum Tax Directive). The notice also cites the provisions of Article 32 of the Minimum Tax Directive that require Member States to ensure the application of "qualifying internationally agreement on safe harbors." For such agreement to be qualified, all Member States need to consent to it. Twenty-six EU Member States are members of the Inclusive Framework that adopted the Package by Consent. Cyprus is not a member of the Inclusive Framework. On 8 January 2026, the Ministry of Finance of Cyprus issued a press release in which it "provides its full assurance and consent to the … Side-by-Side Package, approved by the OECD/G20 Inclusive Framework on BEPS on 5 January 2026, and in particular the Side-by-Side Safe Harbour, the UPE Safe Harbour, the Simplified ETR Safe Harbour, the extension of the Transitional CbCR Safe Harbour, and the Substance-Based Tax Incentives Safe Harbour." In its notice, the Commission lists the safe harbors of the package that were agreed in the Inclusive Framework and notes that all the EU Member States have consented to them. Although not stated explicitly, the Commission seems to suggest in the notice that it believes the safe harbors satisfy the requirements of Article 32 and can therefore be applied under the Minimum Tax Directive. It is anticipated that nearly all Member States will need to undertake measures to transpose and implement the guidance provided in the Package into their respective domestic frameworks. The Package provides important new safe harbors for MNE Groups in scope of the Pillar Two global minimum tax, which may have significant implications for the potential liability under the global minimum tax going forward. Companies should review these new safe harbors and evaluate their potential impacts. The Package is in the form of Administrative Guidance that will be included in the Commentary to the GloBE Model Rules. It is expected that many jurisdictions will need to make amendments to their domestic legislation or regulations to implement these new safe harbors. Therefore, companies should closely monitor whether and how relevant jurisdictions incorporate this guidance into their domestic legislation. MNE Groups should assess their eligibility for both the extended TCSH and the Simplified ETR Safe Harbour for each jurisdiction and fiscal year during the transition period. Timely elections will be critical to maximize compliance relief and minimize risk during the extended transition period. This transition period serves to allow some additional time to adapt systems and processes to the requirements of the new Simplified ETR Safe Harbour. In addition, the Central Record will be updated to identify jurisdictions whose domestic tax regimes are considered by the Inclusive Framework to qualify for the SbS Safe Harbour or the UPE Safe Harbour. Companies should review the treatment of relevant jurisdictions in the Central Record and evaluate the implications for their global minimum tax calculations. At this time, the US is the only jurisdiction that has been identified in the Central Record as qualifying for the SbS Safe Harbour and no jurisdictions have been identified as qualifying for the UPE Safe Harbour. The Package emphasizes that QDMTTs will continue to apply to MNE Groups electing the SbS Safe Harbour or the UPE Safe Harbour and GloBE information returns will still be required, albeit in simplified form. This means that US-headquartered MNE Groups that elect the SbS Safe Harbour are not entirely exempt from Pillar Two requirements. In addition, Fiscal Years beginning in 2024 and 2025 are unaffected by the new rules and therefore any liability or reporting obligations that US companies may have in relation to those years will not be affected. In relation to the tax provision in the financial statements for Fiscal Year 2026 and following, US-headquartered MNE Groups eligible to the SbS Safe Harbour will need to monitor the implementation of the SbS Safe Harbour in jurisdictions with potential taxing rights under the IIR or UTPR in relation to Constituent Entities of the Group.
Document ID: 2026-0226 | ||||||
