Pillar Two ‘Side-by-Side’ arrangement released by OECD
08/01/2026
On January 5, 2026, the OECD announced a new ‘Side-by-Side’ (SbS) agreement, crafted to address concerns raised by the United States about the global minimum tax rules. The deal introduces administrative guidance and extends safe harbour mechanisms, aiming to simplify compliance for multinational enterprises (MNEs).
While the United States (US) is the first to qualify, other countries may also be included if they meet the criteria. It is crucial for affected MNEs to understand these changes, as Australia and other jurisdictions are expected to update their rules to align with the new framework.
To recap, a SbS solution to exempt US-parented multinational groups from the Global Anti-Base Erosion (GloBE) Model Rules (i.e. Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR)) was first proposed between the United States and other G7 nations in July 2025 as part of an agreement for the US to drop the implementation of the Section 899 ‘Revenge Tax’ (see SW’s previous coverage).
After months of intense negotiations, the OECD announced that the 147 members within the Inclusive Framework have now agreed to a package in the form of an administrative guidance to the GloBE Model Rules. The OECD document sets out a number of new safe harbours for the purpose of materially simplifying the compliance burden of the GloBE Model Rules and applying the SbS system. The existing transitional Country-by-Country Reporting (CbCR) Safe Harbour has also been extended for a year. The proposed measures are summarised in the table below:
| New safe harbours introduced | Relevant dates | Summary |
|---|---|---|
| Simplified Effective Tax Rate (ETR) Safe Harbour | Income years commencing 1 January 2027 (or 1 January 2026 in limited circumstances) | • A ‘permanent’ simplified ETR can apply for a tested jurisdiction, provided there were no top-up tax (TUT) for that jurisdiction in the preceding two years. • Simplified ETR is calculated by dividing ‘simplified taxes’ by ‘simplified income’. Where the rate is at least 15%, the TUT is nil. • Notwithstanding the term ‘simplified’, there are still a series of adjustments required – mandatory (e.g. excluded dividends / equity gains, etc), industry specific (e.g. financial services), and optional adjustments. • Amounts are based on financial accounting data to prepare a group’s consolidated financial statements and not CbC report. • MNE groups will need to assess and upgrade their current software and systems to ensure they can accurately calculate and report using the new permanent simplified ETR. |
| Extension to the Transitional CbCR Safe Harbour | Additional one-year extension (from three years) to include years beginning on or before 31 December 2027 | • MNE groups will benefit from an extra year of relief, as the 17% ETR threshold for the CbCR safe harbour will now extend to a fourth year, making compliance easier and reducing tax uncertainty for affected businesses. |
| SbS Safe Harbour | Income years commencing 1 January 2026 | • No TUT is payable under the IIR or UTPR if the ultimate parent entity is located in a jurisdiction with a ‘Qualified SbS Regime’ under the central record. At present, only the US is recorded as satisfying the regime. • Broadly, a qualified regime refers to a jurisdiction that has: – a nominal corporate tax rate of at least 20% – qualified domestic minimum top up taxes (QDMTT) or corporate alternative minimum tax of 15% aligned with minimum taxation objectives – has an eligible worldwide tax system applicable on offshore (active and passive) income of foreign branches and controlled foreign companies – mechanisms to address base erosions and profit shifting – no material risk of an ETR below 15% on domestic and foreign profits. • The QDMTT of a jurisdiction will continue to apply and take precedence • Member jurisdiction can request for its existing tax regimes to be assessed against the eligibility criteria. • US-based groups must continue to follow the existing rules for income years that begin before 1 January 2026. |
| Ultimate Parent Entity (UPE) Safe Harbour | Income years commencing 1 January 2026 | • MNE groups can elect for this safe harbour (which replaces the transitional UTPR safe harbour) such that there is no TUT under UTPR in the UPE jurisdiction, provided that jurisdiction as a ‘Qualified UPE Regime’ (similar to the criteria for SbS safe harbour). • No jurisdiction is currently recorded though the US is expected to qualify. • For completeness, the transitional UTPR safe harbour only applies to the UPE jurisdiction if that jurisdiction has a nominal corporate tax rate of at least 20% and for income years beginning on or before 31 December 2025. |
| Substance-based tax incentives Safe Harbour | Income years commencing 1 January 2026 | • Safe harbour intends to allow MNE groups to continue benefit from certain ‘qualified tax incentives’ (QTI) that are substantially connected to the economic substance for that jurisdiction. • The QTI is added to the adjusted covered taxes but capped at either the greater of 5.5% of eligible payroll costs or depreciation expense in respect of eligible tangible assets, or 1% of carrying value of eligible tangible assets. |
Observations and what this means for Australia
In order for the Australian equivalent rules to maintain their qualified status (in other words administering in a manner consistent with the GloBE Model rules), an amendment to the domestic rules to mirror the OECD changes is expected shortly. Practically, the extension of the transitional CbCR safe harbour for an additional one year would allow multinational groups to improve on their systems in extracting information to meet the Pillar Two compliance obligations.
To avoid roll-back of legislations by jurisdictions that have already implemented the Pillar Two rules, the changes introduced under this SbS arrangement will only apply to income years commencing 1 January 2026. Whilst Australia and other jurisdictions may also seek to demonstrate that it qualifies for the SbS and UPE safe harbours, the registration process may be lengthy, and any further exceptions of jurisdictions (other than US) remain to be seen.
Furthermore, the commencement date of these new changes also mean compliance costs will still be significant, given MNE groups (including US-parented groups) are still required to meet their lodgement obligations in jurisdictions that have already implemented the GloBE Model equivalent rules for income years commencing 1 January 2024 and 2025.
How SW can help
We can assist in undertaking country-by-country analysis of the obligations and consideration of the application of exemptions and safe harbour rules.
We can also support the implementation of SW’s CTS Pillar Two software to facilitate the lodgement of the GloBE Information Return and other lodgement obligations.
In addition, we can help MNE groups assess the impact of the SbS arrangement and anticipated Australian legislative changes, identify data and systems gaps, evaluate safe harbour eligibility, and develop practical compliance strategies to manage ongoing Pillar Two obligations and costs.
