The global minimum tax (Pillar Two) ensures large multinationals (MNEs) with revenues of €750m or more to pay at least 15% tax in every jurisdiction where they operate. This is achieved through three interconnected rules: the Income Inclusion Rule (IIR), Undertaxed Profits Rule (UTPR), and Qualified Domestic Minimum Top-up Taxes (QDMTTs).
Recent OECD guidance and US policy changes have significantly reshaped the compliance landscape for US parented groups. As of January 2026, the OECD’s Side-by-Side (SbS) Package introduces the SbS framework along with additional safe harbours. While US groups will need to navigate SbS requirements carefully, the expanded safe harbour provisions offer broader opportunities that all MNEs should evaluate as part of their Pillar Two strategy to maximise available simplifications.
The US policy pivot—and a path from retaliation to equivalence
- Trump-era resistance: In January 2025, the US withdrew support for Pillar Two, threatening retaliatory taxes on jurisdictions applying IIR-style top-ups to US profits.
- G7 breakthrough: By June 2025, a joint US-G7 statement recognised US minimum tax rules as functionally equivalent to Pillar Two, contingent on a Side-by-Side structure and repeal of retaliation provisions.
- Outcome: This cleared the path for exempting US parented MNEs from IIR and UTPR, once a parallel US system is up and running.
OECD’s SbS package: simplification and coordination
On January 5, 2026, the OECD/G20 Inclusive Framework unveiled the Side-by-Side Package—an administrative extension to the Global Anti Base Erosion (GloBE) Model Rules. It offers relief through:
- SbS and UPE Safe Harbours
- Permanent Simplified Effective Tax Rate Safe Harbour (SESH)
- Extended Transitional CbCR Safe Harbour
- Substance-based Incentive Safe Harbour
Side-by-Side and UPE Safe Harbour
The SbS/UPE Safe Harbour is the cornerstone of the OECD’s Side-by-Side (SbS) package. The package introduces two parallel relief mechanisms:
- SbS Safe Harbour: Allows MNEs with an Ultimate Parent Entity (UPE) in a jurisdiction that meets “Qualified SbS Regime” criteria to opt out of the IIR and UTPR. However, QDMTTs still apply.
- UPE Safe Harbour: This is a narrower counterpart. It applies when the UPE’s home jurisdiction has a robust domestic tax regime but doesn’t necessarily meet the full criteria for the SbS Safe Harbour. It shields the UPE jurisdiction’s profits from UTPR adjustments, but it does not eliminate IIR or UTPR obligations in other countries.
Significantly, the US is now listed in the OECD’s Central Record as a Qualified SbS Regime, effective 1 January 2026. As a result, US parented MNEs with FYs beginning in 2026 can elect the SbS Safe Harbour and they will be exempt from IIR and UTPR, but remain subject to any applicable QDMTTs.
While the US is the sole jurisdiction currently recognised, the OECD plans a review to assess whether other countries should also qualify—especially if they appear to be penalised under Pillar Two.
Action – Plan SbS Harbour elections and continue to monitor OECD guidance and local legislative updates.
The new Simplified Effective Tax Rate Safe Harbour (SESH)
The permanent SESH provides a straightforward way to meet Pillar Two requirements. If a jurisdiction’s simplified Effective Tax Rate (ETR) is 15% or higher, or if a Simplified Loss occurs, the top-up tax is treated as zero. This approach relies on consolidated financial statements with only limited adjustments which can make it make it easier than the full GloBE ETR calculation.
Action – Plan SESH elections for fiscal years starting 31 December 2026 (or 2025 if eligible) but bear in mind the availability of the extended transitional CbCr Safe Harbour included in the next section.
Transitional CbCR Safe Harbour—extended one more year
The transitional CbCR Safe Harbour has been extended by one year. It now applies to fiscal years beginning on or before 31 December 2027 (but not ending after 30 June 2029), with a transitional ETR threshold of 17% for 2026 and 2027. This extension provides additional runway for groups to adopt SESH while maintaining relief for jurisdictions with low top-up tax risk.
Action – Leverage the extended Transitional CbCR Safe Harbour through 2027 to reduce computation burdens where the CbCR indicates high ETRs or low profits.
Substance based incentives: a targeted safe harbour
The new Substance-Based Tax Incentive Safe Harbour is designed to ensure that tax breaks tied to real economic activity—like R&D deductions or energy credits—are treated fairly under the global minimum tax rules. If a company invests in research or production, those qualified incentives (called QTIs) can now help increase its “covered taxes,” reducing the risk of extra top-up tax. However, there’s a limit, called the Substance Cap, which is based on the company’s real operations. This cap is the greater of:
- 5.5% of payroll or depreciation of eligible tangible assets, or
- 1% of carrying value of eligible tangible assets (by election)
This mechanism also allows certain refundable or transferable credits to be treated as QTIs. This approach rewards genuine business activity while preventing companies from getting overly generous tax breaks.
Action – Catalogue incentives and assess QTI treatment under the substance-based safe harbour. Also consider whether to make elections for refundable or transferable credits within the Substance Cap.
What this means for US parented groups active in the UK and UK operations generally
While US parented MNEs can eventually simplify compliance through the SbS Safe Harbour, all UK operations must still meet full Pillar Two obligations for now. For the year ended 31 December 2024, this includes:
- Calculating and paying QDMTTs
- Preparing for IIR and UTPR (UTPR applies from FYs starting 31 December 2025)
- Filing the GloBE Information Return (GIR) by 30 June 2026 (registration deadline was 30 June 2025)
- Considering transitional safe harbours and planning for elections under extended relief measures
Looking ahead, groups should also update their roadmap for 2025 and future periods, ensuring systems and processes are ready for permanent rules and safe harbour elections.
Other jurisdictions that have implemented Pillar Two have similar filing requirements. Many have adopted the 18-month filing deadline similar to the UK but this should be confirmed for each jurisdiction.
For more information on next steps for your group, please contact Mimi Chan or Jannat Moyeen.
