Executive summary

On 5 January 2026, the Organisation for Economic Co-operation and Development (OECD) announced a political and technical agreement by the Inclusive Framework on a comprehensive package for a "side-by-side arrangement" (the Package). The Package, in the form of Administrative Guidance, includes a new Simplified Effective Tax Rate (ETR) Safe Harbour, a one-year extension of the Transitional Country-by-Country Reporting (CbCR) Safe Harbour, a new Substance-based Tax Incentive Safe Harbour and two Safe Harbours related to a Side-by-Side System. This Administrative Guidance will be incorporated into the Commentary to the Global Anti-Base Erosion (GloBE) Model Rules.

The Simplified ETR Safe Harbour will be applicable as of 2027 (and in certain circumstances as of 2026 in jurisdictions that so choose) and is intended to provide compliance simplifications for businesses and tax authorities. The Transitional CbCR Safe Harbour is extended by one year, to include 2027. Taxpayers may be able to choose between the Simplified ETR and Transitional CbCR Safe Harbours during the period of overlap.

The Substance-based Tax Incentive Safe Harbour allows a Multinational Enterprise (MNE) Group to treat Qualified Tax Incentives as an addition to the Covered Taxes of the Constituent Entities located in the jurisdiction, which allows MNE Groups to benefit from certain tax incentives that have the required economic substance connections to the jurisdiction. The election can be made on a jurisdictional basis as of 2026. The Safe Harbour will allow jurisdictions greater flexibility in designing their incentives regimes.

The Side-by-Side (SbS) Safe Harbour provides that MNE Groups with an Ultimate Parent Entity (UPE) in a jurisdiction with a Qualified SbS Regime will not be subject to the Income Inclusion Rule (IIR) or Undertaxed Profits Rule (UTPR) if they elect the SbS Safe Harbour. These MNE Groups will remain subject to Qualified Domestic Minimum Top-up Taxes (QDMTTs). The tax regime in the United States (US) has been identified in the latest update to the Central Record of Legislation with Qualified Status as the only jurisdiction with a Qualified SbS Regime, applicable as of the beginning of 2026. MNE Groups with a UPE in the US will remain subject to the global minimum tax rules in 2024 and 2025.

The UPE Safe Harbour applies to the domestic profits of MNE Groups with a UPE in a jurisdiction that has an eligible domestic tax regime. Such an MNE Group that elects the UPE Safe Harbour will not be subject to the UTPR in respect of the profits located in the UPE jurisdiction.

The Package indicates that the Inclusive Framework will continue working on technical clarifications and simplifications, including for the application of the GloBE Model Rules, as well as on integrity rules.

This Alert provides a summary overview of the Package. A forthcoming EY Global Tax Alert will address these developments in more detail. In addition, click here for registration information on the Global EY webcast on these latest Pillar Two developments scheduled for 12 January 2026.

2026 Side-by-Side Package

On 5 January 2026, the OECD announced a political and technical agreement by the Inclusive Framework on a comprehensive package for a "side by side arrangement" (the Package) with respect to the Pillar Two global minimum tax. The Package is in the form of Administrative Guidance that will be incorporated into the Commentary to the GloBE Model Rules.

Simplifications

The Package states that the Inclusive Framework is committed to delivering material simplifications for both taxpayers and tax administrations in connection with the implementation of the global minimum tax. As a first step in this ongoing commitment, the Inclusive Framework has agreed on a package of simplifications that include a new Simplified ETR Safe Harbour, an extension of the Transitional CbCR Safe Harbour, and a work program with respect to additional simplifications.

Simplified ETR Safe Harbour

The Package indicates that the introduction of a permanent Simplified ETR Safe Harbour seeks to address a key concern of the business community by substantially reducing the compliance burden associated with the global minimum tax. Under this safe harbor, an MNE Group's ETR is determined under a simplified calculation based on the income and taxes from the MNE Group's financial reporting packages, with certain adjustments. If the Tested Jurisdiction has a Simplified ETR of at least 15%, the Top-up Tax is deemed to be zero, and no detailed GloBE calculations need to be made.

The Simplified ETR is computed using data from the financial accounts consistent with the principles of the Globe Model rules, article 3.1.2 and 3.1.3, except as otherwise required by the safe harbor. This means that in most cases, MNE Groups will use financial data used in the preparation of the UPE's Consolidated Financial Statements (CFS) to determine Simplified Income and Simplified Taxes for the Tested Jurisdiction. When a QDMTT jurisdiction has adopted the Local Financial Accounting Standard rule and an MNE Group is required to apply the local financial accounting standard for QDMTT computations, the MNE Group must use the relevant local accounting standard in computing the Simplified ETR for QDMTT purposes.

The adjustments to be made to profit before tax include Basic Adjustments (such as elimination of Excluded Dividends and Excluded Equity Gains or Losses), Industry Adjustments (for financial services and shipping industry) and Conditional Adjustments. Furthermore, a simplification can be applied for the effects of mergers and acquisitions and some specified optional exclusions are available.

The adjustments to be made to the income tax include Policy-based Adjustments (e.g., eliminating taxes that are not Covered Tax and adjustments for refunds), adjustments to align Simplified Taxes and Simplified Income (e.g., elimination of tax related to income that is not included), adjustments for uncertain taxes, adjustments for deferred taxes (e.g. recasting to a 15% rate) and some specified Optional Adjustments.

The Simplified ETR Safe Harbour provides rules for the First Election year and requirements for re-entry into the safe harbor. The "once out, always out" rule that applies for the Transitional CbCR Safe Harbour does not apply to the Simplified ETR Safe Harbour.

The Simplified ETR Safe Harbour will be available to MNE Groups in all jurisdictions for Fiscal Years beginning on or after 31 December 2026 (e.g., 2027 for calendar Fiscal Years) or in certain circumstances beginning on or after 31 December 2025 (e.g., 2026 for calendar Fiscal Years) if jurisdictions so choose.

Extension of the Transitional CbCR Safe Harbour

The Inclusive Framework has also agreed to extend the Transitional CbCR Safe Harbour (TCSH) for one year. This extends the application of the TCSH to Fiscal Years beginning on or before 31 December 2027 (but not including any Fiscal Year that ends after 30 June 2029). For MNE Groups with a calendar Fiscal Year this means the TCSH will be extended to 2027, with a 17% threshold to meet the Simplified ETR test as applies for 2026.

This will provide in-scope MNE Groups with the choice of opting for either the new Simplified ETR Safe Harbour or the Transitional CbCR Safe Harbour during a transition period.

Work program for additional simplification

The Package indicates that the Inclusive Framework is committed to a work program to achieve additional clarifications and simplifications. The Package identifies several elements of this planned work, including finishing the ongoing work on a routine profits test and a de minimis test for the new permanent compliance safe harbor (which is scheduled to be completed within the first half of 2026), taking forward further administrative guidance on technical issues relating to the GloBE Rules and exploring integration of the simplified calculations in the Simplified ETR Safe Harbour into the design of the global minimum tax.

In addition, the Package indicates that the Inclusive Framework will do further work to streamline reporting obligations. This work will consider adaptations to the GloBE Information Return (GIR), the GIR XML Schema and the related validation rules to apply the agreed safe harbors. This work is targeted to be completed in the first half of 2026 so that jurisdictions can adopt the relevant changes to the GIR in time for the Fiscal Years for which the agreed safe harbors apply.

Substance-based Tax Incentives

The Package indicates that the Inclusive Framework has agreed to a safe harbor to allow MNE Groups to continue to benefit from qualifying tax incentives that are sufficiently connected to economic substance in the particular jurisdiction. This treatment is subject to limits that are described as aimed at ensuring the global minimum tax will continue to provide an effective floor on income tax competition between jurisdictions.

The Substance-based Tax Incentive (SBTI) Safe Harbour allows an MNE Group to treat Qualified Tax Incentives (QTIs) as an addition to the Covered Taxes of the Constituent Entities located in the jurisdiction. A QTI is an incentive generally available to taxpayers and calculated based on expenditures incurred (an expenditure-based incentive) or on the amount of tangible property produced in the jurisdiction (a production-based tax incentive). A Substance Cap limits the allowance for QTIs based on the amount of substance in the jurisdiction. The cap is equal to the greater of 5.5% of the payroll costs or depreciation of tangible assets in the jurisdiction. On an elective basis, the MNE Group can use an alternative cap that is equal to 1% of the carrying value of tangible assets in the jurisdiction.

Unlike Qualified Refundable Tax Credits (QRTCs) and Marketable Transferable Tax Credits (MTTCs), QTIs are not included in GloBE Income. Therefore, treatment of an incentive as a QTI could be more beneficial than the treatment provided for QRTCs and MTTCs. An MNE Group can make an Annual Election to treat certain QRTCs or MTTCs as a QTI. Under this election, the QRTC or MTTC is excluded from GloBE Income and is instead treated as a reduction to Adjusted Covered Taxes, before the QTI adjustment to increase Adjusted Covered Taxes is applied in the same way as it applies to any other type of QTI. The Substance Cap limits the total adjustment for QTIs.

A Filing Constituent Entity can make the Substance-based Tax Incentive Safe Harbour election for a Tested Jurisdiction for a Fiscal Year that begins on or after 1 January 2026.

Side-by-Side System

The Package indicates that the Inclusive Framework has agreed to the SbS and UPE Safe Harbours applicable to MNE Groups headquartered in jurisdictions which the Inclusive Framework has determined meet the requirements for an eligible tax regime.

The SbS Safe Harbour will only be available to an MNE Group that has its UPE located in a jurisdiction that has both an eligible domestic tax regime and an eligible worldwide tax regime. These tax regimes will only be eligible if they effectively achieve a minimum level of taxation of MNE Groups' domestic and foreign operations. When it elects to apply this safe harbor, an MNE Group (including all of its Constituent Entities and Joint Ventures or JV Subsidiaries) will not be subject to the IIR or UTPR. The MNE Group will also not be subject to the IIR that would otherwise apply at the level of an Intermediate Parent Entity.

The UPE Safe Harbour will provide a safe harbor with respect to the domestic profits of MNE Groups headquartered in jurisdictions that have a preexisting eligible domestic tax regime. When it elects to apply this safe harbor, an MNE Group will not be subject to the UTPR in respect of the profits located in the UPE jurisdiction.

When the Inclusive Framework has determined that a jurisdiction has a Qualified SbS or UPE Regime, the jurisdiction will be listed as such in the Central Record.

Upon request by a member jurisdiction, the Inclusive Framework will assess that jurisdiction's preexisting tax regimes against the eligibility criteria for a Qualified SbS or UPE Regime by the end of the first half of 2026. The Inclusive Framework will assess the eligibility as a Qualified SbS Jurisdiction of any other member jurisdiction once the jurisdiction initiates such a request to the Inclusive Framework in 2027 or 2028.

The current Central Record lists the United States as a jurisdiction with a Qualified SbS Regime, applicable as of 1 January 2026. Currently, no Qualified UPE Regimes have been included in the Central Record.

All MNE Groups (including those that elect to apply the SbS or UPE Safe Harbours) remain subject to the QDMTT in all QDMTT jurisdictions in which they operate. The Package specifies that a jurisdiction cannot allow an MNE Group to apply the SbS Safe Harbour for purposes of the QDMTT. In all QDMTT jurisdictions, the QDMTT for all MNE Groups must continue to be calculated without the pushdown of taxes on controlled foreign companies or foreign branches.

MNE Groups will be subject to specified GIR filing obligations, including the general Section 1 of the GIR (with the exception of Section 1.4, providing the high-level summary of GloBE information).

Stocktake

The Package indicates that the Inclusive Framework will undertake a stocktake pursuant to a process to be agreed by the Inclusive Framework and concluded by 2029. This will take into account data on the effect of the global minimum tax and the SbS System, including the level of implementation of QDMTTs. The stocktake also will assess unintended effects, such as any emerging material competitive imbalances identified between MNE Groups and trends in taxpayer behavior including changes in corporate structures to shift profits to achieve low-tax outcomes (e.g., inversions or a material increase in profits located in low-tax jurisdictions without QDMTTs).

The Package further indicates that the Inclusive Framework is committed to taking action to address any substantial identified risks to the level playing field or Base Erosion and Profit Shifting (BEPS). The form of any such action will depend upon the common nature and materiality of any risks identified and an assessment of how those risks could be most effectively addressed in a way that preserves the policy objectives of the SbS agreement and the global minimum tax.

Implications

The Package provides important new safe harbors for MNE Groups in scope of the Pillar Two global minimum tax, which may have significant implications for the potential liability under the global minimum tax going forward. Companies should review these new safe harbors and evaluate their potential impacts.

The Package contains Administrative Guidance that will be included in the Commentary to the GloBE Model Rules. Jurisdictions may need to make amendments to their domestic legislation or regulations to implement these new safe harbors. Therefore, companies should also monitor whether and how relevant jurisdictions incorporate this guidance into their domestic legislation.

In addition, the Central Record will be updated to identify jurisdictions with domestic tax regimes that the Inclusive Framework considers qualified for the SbS Safe Harbour or the UPE Safe Harbour. Companies should review the treatment of relevant jurisdictions in the Central Record and evaluate the implications for their global minimum tax calculations.