On January 5, 2026, the Organisation for Economic Cooperation and Development (OECD) released Administrative Guidance including the long-awaited Side-by-Side (SbS) arrangement, adopting a new SbS Safe Harbour exempting U.S.-parented multinational groups from most Pillar Two global minimum tax rules effective for fiscal years (FYs) beginning on or after January 1, 2026. This development was met with enthusiasm by the Department of the Treasury, as well as the Republican leadership of the House Committee on Ways and Means and the Senate Committee on Finance. 

Under the SbS Safe Harbour, multinational groups with an Ultimate Parent Entity (UPE) located in a jurisdiction with a qualified SbS regime can elect to be exempt from top-up tax otherwise due under any Income Inclusion Rule (IIR) or Undertaxed Profits Rule (UTPR). The SbS Safe Harbour does not affect the application of Qualified Domestic Minimum Top-up Taxes (QDMTTs) or other domestic minimum taxes, and it generally does not relieve filing obligations other than with respect to information that would be necessary to determine top-up tax under IIRs and UTPRs (which would be unnecessary due to SbS). The SbS Safe Harbour also does not provide any relief for FYs beginning before January 1, 2026.

The OECD's Central Record has already been updated to reflect that the U.S. has a qualified SbS regime as of January 1, 2026. Importantly, the SbS Safe Harbour is categorical and applies on a jurisdictional basis – available to multinational groups with a U.S. parent UPE without regard to any other specific characteristics of a group. 

The Administrative Guidance represents a significant policy achievement for Treasury and for congressional leadership, which – together with affected industry – argued that U.S. multinationals are already subject to sufficient levels of tax under U.S. law on their worldwide income and therefore that the imposition of IIRs and UTPRs was duplicative, unnecessary, and administratively burdensome. More broadly, the Administrative Guidance also reaffirms the value of the OECD/Group of 20 (G20) Inclusive Framework as a forum for resolving international tax policy disputes on a multilateral basis in a manner that averted unilateral measures or retaliation. 

In addition to the SbS Safe Harbour, the Administrative Guidance includes material simplifications of the Pillar Two rules for multinational groups that remain in scope, including a Simplified ETR Safe Harbour and new comprehensive rules addressing certain tax incentives, the Substance-based Tax Incentives Safe Harbour. Importantly, the Substance-based Tax Incentives Safe Harbour applies to non-refundable tax credits such as the U.S. research and experimentation (R&E) credit, thereby potentially mitigating the application of Pillar Two top-up taxes to the U.S. income of foreign-parented multinational groups. Additional simplification measures are being considered.    

Attention now turns to implementation of the Administrative Guidance in the domestic law of countries that have implemented Pillar Two. Implementation is expected to be orderly in EU member states as a result of the EU Pillar Two Directive, and several countries outside of the EU have announced plans to implement the new rules in accordance with their normal legislative process. Republican taxwriters are keeping their section 899 proposal on the table if necessary. "Back in June, we agreed to remove those measures from the bill when the G7 publicly committed to respecting U.S. tax sovereignty," Senate Committee on Finance Chairman Mike Crapo (R-ID) and House Committee on Ways and Means Chairman Jason Smith (R-MO) said in a joint statement. They reiterated their earlier warning "to revive retaliatory measures if other parties slow walk implementation of that agreement." #TaxTake

Upcoming Speaking Engagements and Events

Mike will speak at the American Bar Association Midyear Tax Meeting on January 15-17, along with several other members of the Tax practice.

In the News

Marc commented on the potential renewal of expired tax provisions in Tax Notes: "I don't think it's a question of if; I just think it's a question of when."
 

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