International tax experts discussed the latest developments on the U.S.’ relationship with the Organization for Economic Cooperation and Development (OECD), the mechanics of the proposed so-called side-by-side agreement, and the implications for U.S. businesses as leaders hope the Pillar Two global minimum tax regime can coexist with new laws.
A September 24 Ernst & Young webcast included insights from Global Transfer Pricing Market and Innovation Leader Ronald van den Brekel and Global Tax Accounting and Risk Advisory Services Leader Brian Foley.
Side-by-Side
Pillar Two is a central part of the OECD’s Base Erosion and Profit Shifting (BEPS) 2.0 initiative. It aims to ensure that large multinational enterprises pay a minimum level of tax, regardless of where they operate. The framework is built on three components: the Income Inclusion Rule (IIR), the Undertaxed Profits Rule (UTPR), and the Qualified Domestic Minimum Top-up Tax (QDMTT).
These rules are already in effect in more than 50 jurisdictions, requiring multinational groups to prepare for new compliance obligations, including registrations, notifications, local tax returns, and the GloBE Information Return for fiscal year 2024.
“The past months, we have seen significant developments, culminating in the G7 statement on Pillar Two and the proposed coexistence of the U.S. tax system and Pillar Two,” van den Brekel said.
The G7’s June meeting in Canada outlined a three-pronged approach for refining the Pillar Two framework:
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- The development of the side-by-side system, which would exempt U.S.-parented groups, including their foreign subsidiaries, from Pillar Two.
- A material simplification of Pillar Two’s administration and compliance framework.
- The introduction of changes to the treatment of tax credits and incentives, particularly substance-based non-refundable tax credits.
In exchange for these refinements, the U.S. agreed to take proposed new Tax Code Section 899 off the table during One Big Beautiful Bill negotiations.
Section 899 would have served as a countermeasure to extraterritorial levies such as the UTPR. “The threat got teeth, so to say, by the announcement that the U.S. would introduce countermeasures to extraterritorial levies such as the UTPR in the form of [IRC § 891] that was already in the code and the proposed Section 899,” van den Brekel said, adding that the removal of Section 899 was met with relief by many countries and non-U.S. businesses.
The side-by-side system itself is still under negotiation, but its core principle is to exempt U.S.-parented groups from Pillar Two’s top-up tax rules. “The first one being the development of this side-by-side system, exempting U.S. parented groups, including their foreign subsidiaries, from Pillar Two,” van den Brekel said.
However, this approach raises questions about the level playing field, as U.S. profits of non-U.S. headquartered companies could still be low-taxed and subject to top-up tax. The OECD and G7 are considering several options to address these concerns, including changes to the OECD model rules, recognizing the U.S. system as a qualified IIR, and introducing safe harbors.
“From the three, the safe harbors are probably the simplest option,” van den Brekel added.
The G7 statement is not a final agreement but a commitment to work toward a side-by-side system based on certain principles. “There are outlines of scenarios, but detailed designs still have to be made and agreed,” van den Brekel said.
Impact on U.S. Taxpayers
For U.S.-parented multinational groups, the side-by-side system would represent a significant shift in their global tax obligations. The system is designed to exempt these groups from both the IIR and UTPR, provided a deal is reached by December 31, 2025. This, Foley said, is the U.S.’ objective.
Such a deal “would then exempt … U.S. companies from both the IIR and the UTPR, so it would effectively turn off any downstream intermediate IIRs, as well as any UTPR,” Foley explained.
However, the exemption is not absolute. U.S. multinationals would still be subject to QDMTTs in countries where these have been legislated. “I think it is important to recognize that under this side-by-side system, we would still have the existence of QDMTTs, and those QDMTTs are already legislated in over 40 countries, and would continue to persist, and U.S. multinationals would be subject to those taxes, even in a side-by-side system,” he said.
Panelists also highlighted the complexity of operating under parallel tax regimes. The coexistence of the U.S. system — including global intangible low-tax income (GILTI), now referred to as net CFC tested income — and the global minimum tax rules would continue, with ongoing concerns about tax sovereignty and the need to avoid future disputes.
“The coexistence of the U.S. system and GILTI … is still expected to continue in those parallel regimes, with other considerations around protection of tax sovereignty that’s very popular with many politicians in the U.S., while also trying to balance a solution that’s going to limit later disputes and challenges or controversy issues as we look forward to a potential parallel system,” Foley said.
If no deal is reached by the deadline, the U.S. may revive Section 899 as a countermeasure. “[C]ertain U.S. parties have insinuated that without a deal, Section 899 could, in fact, be put back on the table,” Foley said.
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