OECD Pillar 2 Side-by-Side Package

On Jan. 5, the OECD released the SbS package, an agreement reached with members of the inclusive framework of over 140 jurisdictions on a substantial set of administrative guidance under Pillar 2 providing targeted safe harbor relief for U.S.-parented MNEs while preserving the integrity of Pillar 2. The package introduces several new and revised safe harbors that recalibrate the interactions between domestic rules and certain top-up taxes under the global anti-base erosion (GloBE) rules, specifically the income inclusion rule (IIR) and the undertaxed profits rule (UTPR).

Background

Pillar 2 establishes a coordinated framework designed to impose a minimum 15% effective tax rate (ETR) on in-scope MNE groups in each jurisdiction in which they operate. The Pillar 2 framework is implemented through a combination of top-up taxes that many member jurisdictions have begun adopting since the model rules were released in 2021.

The interaction between the global minimum tax regime and certain preexisting domestic regimes could result in overlapping taxation and duplicative compliance for U.S.-parented MNEs. Last June, the G7 reaffirmed support for global minimum tax regimes, while recognizing the need for administrable outcomes and reduced complexity. The SbS package is intended to address these concerns while preserving the integrity of the common approach.

Overview

The SbS package provides four new safe harbor elections for MNEs and extends the transitional country-by-country reporting (CbCR) safe harbor for another year. The administrative guidance included in the SbS package will be incorporated into the commentary of the GloBE Model Rules, and the OECD will assess the effect of the global minimum tax rules and the SbS framework through 2029.

SbS safe harbor

Generally, beginning in 2026, the SbS safe harbor applies to MNEs that have an ultimate parent entity (UPE) located in a jurisdiction that qualifies as a “qualified SbS regime.” Under this safe harbor, it deems top-up tax to be zero for purposes of both the IIR and the UTPR across the entire group.

To qualify, the UPE jurisdiction must have both an eligible domestic tax regime and an eligible worldwide tax regime and provide a foreign tax credit (FTC) for qualified domestic minimum top-up taxes (QDMTTs), subject to domestic law limitations. These eligible domestic and worldwide tax systems must have been enacted prior to Jan. 1, 2026. If enacted later, the OECD will assess the eligibility upon request by jurisdiction in 2027 or 2028.

Jurisdictions that meet the criteria are listed on a publicly maintained central record, which is the authoritative reference for determining qualification as a qualified SbS regime. Currently, the U.S. is the only jurisdiction recognized as having a qualified SbS regime.

Crowe observation

U.S.-parented MNEs remain subject to QDMTTs and related GloBE information return filing even if an SbS safe harbor election applies.

UPE safe harbor

Beginning in 2026, the UPE safe harbor permanently replaces the traditional UTPR safe harbor with respect to the domestic profits of the UPE jurisdiction and deems top-up tax to be zero for UTPR allocation on profits in the UPE jurisdiction.

To satisfy the jurisdictional requirements for the UPE safe harbor, a jurisdiction must operate an eligible domestic tax system meeting criteria similar to those required for a qualified SbS regime. Eligibility will be reflected in the central record with the SbS safe harbor. Currently, no jurisdictions have been recognized as having a qualified UPE regime.

Substance-based tax incentive safe harbor

Beginning in 2026, the substance-based tax incentive safe harbor treats certain qualified tax incentives (QTIs) as an addition to the covered taxes (the numerator of ETR calculation). QTIs include incentives that reduce liability for a covered tax and are calculated based on qualifying expenditures or tangible production in the jurisdiction. This adjustment is subject to a substance-based cap, calculated as the higher of 5.5% of payroll costs or depreciation of tangible assets, or, alternatively, 1% of the carrying value of tangible assets.

Crowe observation

The substance-based safe harbor could be narrower in effect than other safe harbors because it does not offer a blanket exemption for incentives.

Simplified ETR safe harbor

Generally beginning in 2027, the simplified ETR safe harbor provides a permanent alternative to full GloBE calculations based on a simplified jurisdictional ETR calculation derived largely from financial accounting data, subject to prescribed adjustments. Top-up tax is deemed to be zero for a jurisdiction if the jurisdiction had no top-up tax liability in the prior two years and has either a simplified ETR of 15% or higher or reports a simplified loss.

Extended transitional CbCR safe harbor

The SbS package extends the transitional CbCR safe harbor for MNEs with a 17% ETR for one year through 2027. The extension is intended to provide continuity while the simplified ETR safe harbor is being phased in. During the overlap period, MNE groups might be able to choose between regimes, depending on jurisdictional implementation.

Looking ahead

The availability of these safe harbors depends on adoption by individual jurisdictions into domestic law or administrative practice, making it critical to monitor jurisdictional implementation status. Specifically, while QDMTTs remain unaffected, U.S.-parented MNEs should consult their tax advisers to assess the applicability of the SbS package safe harbors to intermediate foreign subsidiaries subject to the IIR and UTPR for financial statement purposes beginning in the first quarter of 2026.