At the beginning of January 2026, the OECD published a document in connection with the global minimum tax introducing the so-called “Side-by-Side” system. The document sets out a political and technical agreement on the parallel and complementary operation of the global minimum tax and domestic tax systems. 

In addition to preserving the original objectives of Pillar Two, the initiative aims to simplify the global minimum tax framework, reduce tax compliance burdens, and provide more favorable treatment for tax incentives that are closely linked to economic substance. These include, for example, non-refundable research and development tax credits and production-based incentives, for which the system excludes the application of top-up tax up to a defined threshold.

According to the OECD’s publication, at present, only the United States qualifies as a jurisdiction with an “eligible tax regime” for the purposes of applying the Side-by-Side system. At the same time, legislators and the parties to the agreement have acknowledged that it will take considerable time for individual countries to transpose the agreement into their domestic legal frameworks. It is important to note that, in light of the agreement reached between the OECD and the Trump administration, the United States is, based on currently available information, already in a position to apply the Side-by-Side system to U.S. multinational enterprises. As a result, these companies are exempt from certain key Pillar Two rules, most notably the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR).

The Side-by-Side package contains several key elements, and its operation is built around two so-called safe harbor mechanisms.

• The first is the Side-by-Side Safe Harbor, which allows eligible multinational groups to benefit from a partial exemption from the global minimum tax rules. This safe harbor may be applied by multinational enterprises whose headquarters are located in a jurisdiction that has an eligible tax regime for the purposes of the system, provides a foreign tax credit mechanism in respect of qualified domestic minimum top-up taxes (QDMTTs), and introduced its relevant domestic tax rules before 1 January 2026. Multinational groups meeting these conditions are exempt from the application of the IIR and the UTPR. However, this exemption does not affect the application of the Qualified Domestic Minimum Top-up Tax, which continues to play a key role in safeguarding the effectiveness of the Pillar Two framework.
• The second exemption mechanism applies to Ultimate Parent Entities (UPEs) and effectively removes parent companies headquartered in jurisdictions with an eligible tax regime from the scope of Pillar Two with respect to their domestic activities. This is subject to the conditions that the jurisdiction applies a nominal corporate income tax rate of at least 20%, has implemented a QDMTT or a 15% alternative minimum tax based on financial accounting income, and that there is no material risk that the effective tax rate on domestic profits in the parent company’s jurisdiction would fall below 15%.

Another important element of the agreement is that the OECD has extended the transitional Country-by-Country Reporting (CbCR) safe harbor until the end of 2027 and will introduce a permanent simplified Effective Tax Rate (ETR) safe harbor from 2027 onwards. These measures enable multinational groups, subject to meeting certain conditions, to avoid the highly complex and costly GloBE calculations.

Overall, the agreement significantly mitigates the practical impact of the global minimum tax on U.S. multinational enterprises (as already mentioned, currently only the US can apply the provisions), while, according to the OECD, preserving the core objective of Pillar Two, namely the curtailment of harmful tax competition and profit shifting at the international level.