While the Organization for Economic Development’s (OECD) new global minimum tax guidance is welcome relief for U.S.-parented multinationals, a new safe harbor does not cover local top-up taxes imposed by certain jurisdictions, a senior international tax expert cautioned.
Pillar Two and the Side-by-Side Safe Harbor
The Pillar Two framework, part of the Global anti-Base Erosion (GloBE) rules, is designed to ensure that large multinational enterprises (MNEs) with annual revenue over 750 million euros are subject to a minimum effective tax rate (ETR) of 15% on income in each jurisdiction where they operate.
The framework functions through a combination of mechanisms, chiefly the income inclusion rule (IIR), which imposes a top-up tax on a parent entity for low-taxed foreign income, and the undertaxed profits rule (UTPR), which serves as a backstop. Many jurisdictions are also implementing qualified domestic minimum top-up taxes (QDMTTs) to collect any top-up tax on profits generated within their borders. The so-called “side-by-side” framework was put forth by the G7 in June to create a system that would exempt U.S.-parented MNEs from the Pillar Two rules.
The new guidance formalizes this concept through the Side-by-Side (SbS) safe harbor. This permanent safe harbor allows an eligible MNE group to be deemed to have zero top-up tax for purposes of the IIR and UTPR. To be eligible, the group’s ultimate parent entity (UPE) must be located in a jurisdiction with a “Qualified SbS Regime,” which requires having both an eligible domestic and an eligible worldwide tax system that meets minimum taxation requirements.
The United States is currently the only jurisdiction listed in the OECD’s Central Record as having a Qualified SbS Regime. This relief applies for fiscal years beginning on or after January 1, 2026, and effectively alleviates U.S.-headed groups from the main international components of Pillar Two.
Reception
According to Ryan Bowen, a principal in Deloitte Tax LLP’s Washington National Tax office, the guidance was largely in line with expectations for U.S. companies that had been closely following developments. “That’s not to undersell the guidance by any stretch in terms of how it would operate, which of the Pillar Two taxes it would turn off, right? Just the IIR, just the UTPR,” Bowen told Checkpoint, noting that the exclusion of local QDMTTs was not a surprise.
However, he observed that some companies may have been surprised by the ongoing compliance burdens. A common misconception was that the guidance would eliminate all Pillar Two obligations for U.S. MNEs, including for 2024 and 2025. “Some clients were very much in wait and see on the side-by-side, hoping that it solved all of their Pillar Two problems, right? That they wouldn’t have to comply with QDTs. Maybe they wouldn’t even have 2024 or 2025 compliance obligations,” Bowen explained. “That’s obviously not the case now.”
Another area of interest has been the mechanics of the compliance process itself. Bowen noted that the guidance still envisions U.S. MNEs using the centralized GloBE Information Return (GIR) to satisfy their QDMTT obligations in foreign jurisdictions. While this centralized model offers efficiencies, some companies had been considering a more localized, decentralized filing approach and were waiting to see how the final guidance would shape that decision. The confirmation of the centralized GIR model, even with the SbS safe harbor in place, provides important clarity for structuring compliance functions.
Compliance and Tax Planning
The most critical compliance takeaway from the new guidance is that the SbS safe harbor does not affect the application of QDMTTs. U.S.-parented MNEs remain fully subject to any QDMTTs enacted in the jurisdictions where they operate. “It very much looks like QDMTTs are here to stay, and even us MNEs are going to be subject to those rules,” Bowen stated.
He emphasized that companies cannot afford to pause their readiness efforts, as the new guidance has no impact on 2024 or 2025 filing requirements. “Now is the time, if you haven’t started already, to really think about preparing for this 2024 compliance obligations,” he urged. The ongoing relevance of QDMTTs means that the other safe harbors included in the package remain highly important for U.S. companies seeking to simplify their compliance burdens in those jurisdictions.
For tax planning, the release of the guidance package “crystallizes the stakes” of U.S. versus rest-of-world tax planning, according to Bowen. Following recent U.S. legislative changes, many companies began reassessing their global tax footprints but were hesitant to commit to a strategy while the SbS system was still in flux. With the rules now finalized, companies have a clearer picture and can move forward with modeling and decision-making.
Bowen also clarified that while the rules are written to allow other countries to adopt a qualifying SbS system, he is not aware of any currently pushing to do so. He also addressed what might happen if the U.S. corporate tax rate were to fall below the required 20% threshold. He explained that there is no automatic “trip wire” that would revoke the U.S.’ qualified status.
Instead, such a change would likely trigger the “stock take” procedures described in the guidance, a formal review process to ensure the system is working as intended.
For more on the application of Pillar Two top-up taxes, see Checkpoint’s Federal Tax Coordinator 2d ¶ O-4229.
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