One cross-border tax attorney sees the Organization for Economic Cooperation and Development’s (OECD) new side-by-side safe harbor as patchwork relief for U.S.-parented multinationals, given its non-binding nature and the continued exposure to local top-up taxes.
Instead of a clean exemption from the OECD ‘Pillar Two’ 15% global minimum tax adopted by 140 other counties, the framework leaves U.S. companies facing ongoing compliance challenges, according to Robert Christoffel, counsel at Saul Ewing.
A ‘Gentleman’s Agreement’
An open question with the new so-called side-by-side agreement adopted by the OECD early in January is the legal authority of the guidance itself. Christoffel, a German-born tax professional whose career has spanned both European and U.S. tax law, cautioned that the side-by-side framework is not legally binding on its own. He stressed that, unlike a European Union directive which can be directly applicable in member states, OECD guidance is not self-implementing.
For the rules to have any legal force, they must be adopted through domestic legislative processes in each individual jurisdiction. “The OECD is not like” the EU, Christoffel explained, describing the framework as more of a “handshake” or a “gentleman’s agreement” than a binding law. This raises fundamental questions about its technical legitimacy. He noted that in many countries, including Germany, any act by the government must be traceable back to elected officials.
“Nobody really voted for the people at the OECD, at least not directly,” Christoffel said.
This underlying tension means that even after the EU references OECD guidance in one of its directives, its implementation could face legal opposition within member states. Christoffel mentioned an ongoing case in Belgium questioning the constitutionality of the Undertaxed Profits Rule (UTPR).
For the U.S., which was a key negotiator but has not passed any legislation to formally adopt the Pillar Two rules, the guidance remains just that: guidance. The effectiveness of the framework is entirely contingent on future legislative action, which is far from guaranteed.
QDMTT Carve-Out
The biggest limitation of the new Side-by-Side (SbS) safe harbor is its explicit exclusion of qualified domestic minimum Top-up Taxes (QDMTTs). This means that even if a U.S.-parented MNE qualifies for the safe harbor — thereby avoiding the Income Inclusion Rule (IIR) and UTPR — its subsidiaries operating in foreign jurisdictions that have enacted a QDMTT will still be subject to a local top-up tax. Those countries can still increase the subsidiary’s tax rate to the global minimum of 15%.
This should dispel any notion that the side-by-side deal is a blanket exemption from Pillar Two. Christoffel emphasized that this exclusion has major implications for both tax liability and compliance burdens. The tax liability remains because local jurisdictions are empowered to collect the top-up tax themselves. Further, the compliance workload persists and may even become more complex.
According to Christoffel, a U.S. MNE with subsidiaries in QDMTT jurisdictions will still need to perform the whole income and effective tax rate calculation under those local rules, which may differ from U.S. generally accepted accounting principles or international financial reporting standards. This requires navigating a tangled web of different accounting and tax standards across jurisdictions and filing a “full-fledged Global Information Return filing obligation,” he noted.
The relief offered by the SbS safe harbor is therefore limited as it does not eliminate the substantial administrative work associated with QDMTT compliance. “So now you suddenly have a lot more of a compliance burden than you would have expected,” Christoffel said, concluding that the reality of the side-by-side system is far from the simple “leave our U.S. companies alone” message some may have hoped for.
Load-Bearing Safe Harbors
Ultimately, the new framework fails to deliver the one thing Christoffel says heads of tax at MNEs crave most: clear, practical guardrails. While the SbS system was intended to provide a stable path forward, the combination of its non-binding nature, the QDMTT carve-out, and the proliferation of other safe harbors has created a complex landscape that is difficult to navigate.
“We’re … inundated by with safe harbors,” he noted. “And sometimes it’s hard to keep track of all of them.” This deluge of guidance, each with its own rules and applicability dates, contributes to the overall sense of instability rather than resolving it. For tax leaders, the primary goal is not necessarily achieving the lowest possible tax rate, but gaining predictability in their global tax obligations. “At least in my conversations with the stakeholders, the number one thing that I hear is certainty,” Christoffel said.
“Our compliance costs are exploding,” they have told him. “We care a lot less about effective tax rate … than certainty.”
The effectiveness of the SbS safe harbor is contingent on timely legislative adoption across numerous countries, which is not guaranteed, he continued. A delay in one jurisdiction can have cascading effects, creating further instability for tax planning. Christoffel also pointed out that the entire system could be thrown into flux by a change in the U.S. administration or if other countries alter their tax policies.
Christoffel urged companies and professionals to “really pay attention to it and see what happens.”
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