The Organisation for Economic Co-operation and Development (OECD) issued a side-by-side package (the package) on January 5, 2026, resolving many of the concerns that U.S.-parented multinational companies had with the Pillar Two international tax regime. The package establishes a new “Side-by-Side Safe Harbour” (SbS safe harbor) that, once adopted in local jurisdictions (i.e., the European Union, which has confirmed the application of the package in its minimum tax rules) will enable U.S.-parented multinationals to elect to be exempt from both the income inclusion rule (IIR) and undertaxed profits rule (UTPR) of Pillar Two. U.S.-parented multinationals will remain subject to qualified domestic minimum top-up taxes (QDMTTs).
Below is a summary of Pillar Two and the key points in the package relevant for U.S.-parented multinationals.
Pillar Two Overview
The global tax regime known as Pillar Two imposes a 15% minimum tax on large multinational groups in each jurisdiction in which they operate. If a multinational’s entities in a particular jurisdiction are taxed at less than a 15% rate (generally measured based on financial statement information), that jurisdiction can impose a QDMTT to raise the effective tax rate (ETR) to 15%. If a jurisdiction does not impose a QDMTT and a multinational’s entities in that jurisdiction have an ETR below 15%, the undertaxed amount can be taxed in the jurisdiction of the multinational’s parent or higher-tier subsidiary under an IIR. If neither a QDMTT nor an IIR taxes the undertaxed amount, it can be taxed in the jurisdictions of brother and sister subsidiaries under a so-called UTPR. Pillar Two is designed to encourage countries to impose a 15% corporate tax rate. It has been approved by more than 140 countries, known as the OECD Inclusive Framework. The United States signed on in concept but has not enacted legislation consistent with the OECD’s model rules for implementing the regime. The United States, despite enacting the Global Intangible Low-Taxed Income (GILTI) regime (now the net CFC tested income regime), does not have a qualifying IIR under the OECD model rules and thus must rely on exceptions to the UTPR and IIR.
Key Points for U.S.-parented Multinationals
1. U.S.-parented multinationals can elect exemption from UTPRs and IIRs under the new SbS safe harbor.
Retroactive to January 1, 2026, U.S.-parented multinationals can elect exemption from the UTPR and IIR under the new SbS safe harbor. If the U.S. parent elects to apply the safe harbor, the regime will apply to all constituent entities in the group, including joint ventures and joint venture subsidiaries (as defined in the OECD model rules).
The package also provides protections for U.S. multinationals in the event a local jurisdiction does not implement the SbS safe harbor. If a UTPR jurisdiction does not adopt the SbS safe harbor, they will not be able to tax more than their previous share of undertaxed profits (using the same apportionment rules had no jurisdiction adopted the SbS safe harbor).
2. The SbS safe harbor does not fix issues in prior years.
As mentioned, the SbS safe harbor only applies beginning January 1, 2026. U.S.-parented companies could previously rely on a transitional safe harbor contained in the OECD model rules (and adopted in many jurisdictions, notably in the EU’s minimum tax rules) for tax years that began on or before December 31, 2025, and end before December 31, 2026. The transitional safe harbor provides that if the jurisdiction of the parent entity of a group imposes a corporate income tax that applies at a rate of at least 20%, the UTPR top-up tax amount will be zero for each year during the transition period. Since the U.S. corporate tax rate is 21%, U.S.-parented multinationals were eligible for the transitional safe harbor. However, unlike the SbS safe harbor, the transitional safe harbor does not apply for all constituent entities in the group, creating potential compliance issues for subsidiaries in a U.S.-parented group.
3. Unless the OECD modifies their model rules again, the SbS safe harbor generally requires the United States to maintain its corporate alternative minimum tax and a 20%+ corporate tax rate.
In order for the SbS safe harbor to apply for U.S.-parented multinationals, the United States must have a “qualified SbS regime,” which consists of:
a. An eligible domestic tax system
b. An eligible worldwide tax system
c. Foreign tax creditability for QDMTTs
The OECD’s central record currently provides that the United States operates a qualified SbS regime. The package further provides that a jurisdiction listed on central record must notify the OECD within three months if it materially amends its tax regime, and the OECD will consider the best path forward.
An eligible domestic tax system must (i) impose a corporate income tax that applies at a rate of at least 20%, (ii) include a QDMTT or corporate alternative minimum tax (CAMT) at a nominal rate of at least 15%, and (iii) have no material risk that an ETR below 15% will apply on profits from domestic operations. If the United States were to lower the corporate tax rate or repeal CAMT, it would be at risk of not having an eligible domestic tax system.
An eligible worldwide tax system must (i) impose a comprehensive tax regime to all corporations on foreign income, applying broadly to include both active and passive income of controlled foreign corporations (CFCs) even if that income is not distributed to shareholders (with limited exceptions); (ii) include mechanisms to address base erosion and profit shifting (BEPS) risks; and (iii) have no material risk of an ETR below 15% on profits from their collective foreign operations. Substantial changes to §§ 951 or 951A could affect the United States’s eligibility for the safe harbor.
Finally, the jurisdiction must provide foreign tax creditability for QDMTTs. In Notice 2023-80, the IRS provided that they intend to issue proposed regulations which credit “final top-up taxes” and included an example illustrating that QDMTTs are creditable. If the IRS ever pulled the notice, the safe harbor may no longer apply.
4. QDMTTs still apply, but rules in the OECD’s package could simplify compliance.
U.S.-parented multinationals are still subject to the QDMTTs. The package introduces a “simplified” (yet still 58 pages) safe harbor that could ease the burden of compliance if the company’s ETR is high enough in a QDMTT jurisdiction (the “simplified ETR safe harbor”). If a company has a simplified ETR of at least 15% in a given jurisdiction, the amount of top-up tax in that jurisdiction is zero. The safe harbor generally allows companies to determine their ETR under a simplified calculation based on income and taxes pulled from the company’s financial statements (assuming the local jurisdiction uses the same accounting rules that the company does), with adjustments. As a result, there is potential for a more “simplified” approach to compliance for U.S. multinationals already subject to a high level of tax in QDMTT jurisdictions that adopt the safe harbor.