The OECD’s January 2026 Side-by-Side Safe Harbor limits the application of Pillar Two’s Income Inclusion Rule and Undertaxed Profits Rule to eligible US-parented multinationals. Where validly elected, top-up tax under those two rules is treated as zero. The Qualified Domestic Minimum Top-up Tax, however, continues to apply in every jurisdiction that has adopted it.
Five Steps to Assess Your Group’s Position
- Determine scope – Confirm whether your group has consolidated revenues exceeding EUR 750 million in at least two of the previous four fiscal years and is therefore in-scope for Pillar Two.
- Assess SBS eligibility – Verify whether your Ultimate Parent Entity is located in a jurisdiction formally listed in the OECD Central Record as a Qualified SBS Regime.
- Map QDMTT exposure – Identify every jurisdiction where your group operates that has enacted a QDMTT, as this tax continues to apply regardless of any SBS election.
- Address 2024 and 2025 obligations – The SBS safe harbor takes effect only from January 1, 2026. Full GloBE compliance is still required for earlier fiscal years.
- Monitor developments – Track whether additional countries seek and receive SBS qualification, and follow the OECD’s built-in review process as it evolves.
What Is Pillar Two?
In October 2021, over 135 jurisdictions agreed on a two-pillar solution to reform the international tax framework in response to the challenges of economic digitalisation. The OECD published the Global Anti-Base Erosion (GloBE) Model Rules in December 2021 as the legislative backbone of Pillar Two.
The objective is direct: large multinational enterprise (MNE) groups must pay a minimum effective tax rate (ETR) of 15% on the income arising in each jurisdiction where they operate. The rules apply to MNE groups with consolidated revenues of at least EUR 750 million in at least two of the preceding four fiscal years.
Pillar Two works through three coordinated mechanisms:
- Qualified Domestic Minimum Top-up Tax (QDMTT) – The local jurisdiction applies a top-up tax where the MNE’s local ETR falls below 15%, retaining that revenue domestically rather than ceding it to another country’s treasury.
- Income Inclusion Rule (IIR) – The primary mechanism under which the parent entity’s home jurisdiction imposes a top-up tax on low-taxed foreign income where the effective tax rate in a jurisdiction falls below 15%. Where a QDMTT has been imposed and covers the full top-up amount, it is credited against the IIR liability, reducing the net IIR charge to zero. The IIR remains applicable as the primary charging rule regardless of whether a QDMTT is in place.
- Undertaxed Profits Rule (UTPR) – A backstop that applies where neither the QDMTT nor the IIR has collected the required top-up tax.
Implementing jurisdictions are not obligated to adopt all three mechanisms. The QDMTT is widely adopted because it allows each country to secure the top-up tax on locally earned income before another jurisdiction can claim it.
What Is the OECD Side-by-Side Safe Harbor?
On January 5, 2026, the OECD’s Inclusive Framework on Base Erosion and Profit Shifting agreed a new package of administrative guidance under the Pillar Two global minimum tax rules. Formally titled “Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two), Side-by-Side Package,” the guidance introduced several significant measures.
The centerpiece for US-parented MNE groups is the Side-by-Side (SBS) Safe Harbor. It allows MNE groups headquartered in qualifying jurisdictions to treat top-up tax as deemed zero for IIR and UTPR purposes, across both domestic and foreign operations, provided the group satisfies specified eligibility criteria and makes a valid election. The safe harbor is effective for fiscal years beginning on or after January 1, 2026. It carries no retroactive reach. Groups with fiscal years already completed in 2024 or 2025 remain fully subject to the standard GloBE rules for those periods.
The SBS Safe Harbor is an elective mechanism. Groups that do not satisfy the eligibility criteria, or whose UPE is not listed in the OECD Central Record as a Qualified SBS Regime, cannot make use of it.
Beyond the SBS Safe Harbor, the package also introduced a separate Ultimate Parent Entity (UPE) Safe Harbor, a permanent Simplified Effective Tax Rate Safe Harbor, an extension of the Transitional Country-by-Country Reporting Safe Harbor, and a new Substance-based Tax Incentives Safe Harbor.
Why Do US Multinationals Qualify?
For a jurisdiction to be recognized as a Qualified SBS Regime, it must satisfy three cumulative conditions: it must maintain both an eligible domestic tax system and an eligible worldwide tax system; it must provide a foreign tax credit for QDMTTs on the same terms as other creditable covered taxes; and those systems must have been enacted before January 1, 2026, or a later date in line with OECD procedures. Jurisdictions meeting those conditions are listed in the OECD Central Record. As of January 1, 2026, the United States is the only jurisdiction listed.
The US qualifies because its existing international tax framework – most notably its minimum tax on the foreign earnings of US-based MNEs – was already in place before the SBS package took effect. The US agreed to the original Pillar Two framework but did not enact the GloBE rules domestically, creating a structural tension. The SBS arrangement resolves that tension by treating the US regime as broadly equivalent in effect to the GloBE minimum tax objectives.
From GILTI to NCTI: What the One Big Beautiful Bill Act Changed
The One Big Beautiful Bill Act (OBBBA), which Congress passed on July 3, 2025, and which was signed into law on July 4, 2025, is among the most significant pieces of federal tax legislation since the Tax Cuts and Jobs Act of 2017. It brought sweeping changes to US international tax rules.
Under the OBBBA (P.L. 119-21, Sec. 70323), the regime previously known as Global Intangible Low-Taxed Income (GILTI) is renamed Net CFC Tested Income (NCTI), effective for tax years beginning after December 31, 2025. The Section 250 deduction on NCTI is set at 40% for those years, down from 50% under the prior GILTI regime. The OBBBA also eliminates the Qualified Business Asset Investment (QBAI) exclusion, which previously allowed a 10% deemed return on tangible assets to reduce the amount of income subject to inclusion. This expands the taxable base under NCTI relative to GILTI.
One structural tension remains relevant for Pillar Two purposes. The effective rate on NCTI falls below the 15% Pillar Two minimum. This is the primary reason why QDMTT obligations continue to matter for US-parented groups operating in implementing jurisdictions. Where a jurisdiction has enacted a QDMTT, it applies on a standalone basis to locally earned income, regardless of what the US parent pays under NCTI.
What Does the Safe Harbor Actually Cover – and What Does It Not?
The SBS Safe Harbor directly addresses the IIR and the UTPR. A valid election deems top-up tax under both rules to be zero, across the group’s worldwide operations, for the electing fiscal year.
What it does not touch is the QDMTT. QDMTTs continue to apply in all implementing jurisdictions. They are assessed on a standalone basis and are not reduced by taxes that the US parent has paid on CFC income under NCTI. For US-parented groups with operations across Europe, Asia-Pacific, and other regions where QDMTTs have been widely enacted, meaningful local top-up tax obligations can still arise.
GloBE Information Return reporting obligations also remain, even for groups that make the SBS election. Tax compliance does not disappear – it is reconfigured.
Implementing the SBS Safe Harbor into domestic law will also take time. The package takes the form of OECD administrative guidance. Jurisdictions that have enacted Pillar Two into domestic law will generally need to amend that law before the guidance has binding local effect. Some jurisdictions may be faster than others, and this creates a transition risk that US-parented groups should monitor closely.
How Does NCTI Compare to OECD Pillar Two?
Both regimes target minimum taxation of cross-border income. Their structural differences, however, are significant in practice.
Feature | Pillar Two (GloBE) | NCTI (formerly GILTI) |
Calculation base | Accounting income | US taxable income |
Blending method | Jurisdictional | Global |
Payroll and tangible asset carve-out | Permitted | Not permitted (post-OBBBA) |
Effective minimum rate | 15% | Below 15% floor (before foreign tax credits) |
The blending approach is the most operationally significant difference. Pillar Two measures each jurisdiction independently. A group with a 5% ETR in one country cannot use a 25% ETR in another to avoid top-up tax in the first. NCTI consolidates income and taxes across all foreign jurisdictions into a single global pool. High-taxed income in one country can absorb low-taxed income in another, potentially eliminating any US-level tax liability.
The removal of the tangible asset carve-out under NCTI is also notable. Pillar Two’s Substance-based Income Exclusion reduces the amount of excess profit subject to top-up tax for groups with significant payroll and physical assets in a jurisdiction. NCTI no longer provides an equivalent offset following the OBBBA’s elimination of QBAI.
What Does This Mean for the Future of Pillar Two?
Pillar Two was conceived as a near-universal floor on corporate taxation. Its architecture assumed broad and largely uniform adoption. The SBS arrangement marks a meaningful shift toward a more differentiated framework.
The Inclusive Framework has indicated that other jurisdictions may seek SBS treatment by requesting an assessment against the eligibility criteria. Countries can apply for recognition in 2026, with further assessment windows in 2027 and 2028. Countries such as Brazil and India, which operate established minimum taxation frameworks, have expressed interest. Whether either qualifies will depend on the OECD’s technical evaluation of their domestic and worldwide tax systems against the SBS criteria.
The package also includes a built-in monitoring mechanism. The Inclusive Framework will assess whether the SBS arrangement produces unintended distortions, including material competitive imbalances between MNE groups or structural shifts in corporate behavior aimed at achieving low-tax outcomes.
The Compliance Cost Advantage – and Its Structural Implications
Pillar Two imposes substantial obligations on in-scope groups: internal system restructuring, granular data collection on a jurisdiction-by-jurisdiction basis, and GloBE Information Return filings. US-parented groups with an SBS election in place sidestep much of this burden for 2026 onwards. Non-exempt groups bear the full cost.
This asymmetry raises a legitimate question for boards and tax directors: does the location of a group’s Ultimate Parent Entity now carry direct financial value, measured in compliance savings? The honest answer is yes – and that dynamic could influence holding structure decisions over the medium term.
Whether Pillar Two ultimately achieves the uniform global implementation it was designed for depends on how many jurisdictions seek SBS or UPE regime status, how the monitoring process unfolds, and whether non-qualifying countries conclude that full compliance remains in their economic interest.
Key Takeaways
- On January 5, 2026, the OECD released the Side-by-Side Package, introducing the SBS Safe Harbor for eligible US-parented MNE groups.
- The SBS election deems IIR and UTPR top-up tax to be zero. It applies from January 1, 2026, and has no retroactive effect on 2024 or 2025 obligations.
- The QDMTT continues to apply in all implementing jurisdictions, assessed on a standalone basis and unaffected by any SBS election.
- As of January 1, 2026, the United States is the only jurisdiction formally recognized as a Qualified SBS Regime in the OECD Central Record.
- The effective NCTI rate falls below the 15% Pillar Two floor. This is why QDMTT exposure remains material for US-parented groups.
- Other jurisdictions, including potentially Brazil and India, may apply for SBS recognition. Assessment windows are open in 2026, 2027, and 2028.
- GloBE Information Return reporting obligations continue even where the SBS election applies.
- Domestic implementation of the SBS guidance will require legislative action in most Pillar Two jurisdictions, and timelines will vary.
To read more about Transfer Pricing, click here.
Conclusion
The 2026 OECD side-by-side safe harbor is a landmark development for Pillar Two US multinationals. It does not eliminate all Pillar Two exposure, but it reshapes the compliance landscape substantially for groups that qualify and elect to use it. The key question is no longer whether the US is inside Pillar Two – it is whether your specific group’s structure, operations, and QDMTT footprint are well understood.
Groups that assume the SBS election removes all Pillar Two obligations risk underestimating what remains. Groups that have not yet assessed their pre-2026 compliance position face a more immediate problem: those obligations are already due.
The TPTax team advises multinational groups on Pillar Two positioning, NCTI analysis, QDMTT exposure mapping, and global minimum tax compliance. If you need to assess your group’s SBS eligibility, quantify your ongoing QDMTT obligations across implementing jurisdictions, or address open 2024 and 2025 compliance requirements, click here to contact us.
Frequently Asked Questions
What is the OECD Side-by-Side Safe Harbor for Pillar Two?
The SBS Safe Harbor is an elective arrangement released by the OECD on January 5, 2026. It treats IIR and UTPR top-up tax as zero for eligible US-parented MNE groups that make a valid election for fiscal years beginning on or after January 1, 2026.
Do US multinationals still face Pillar Two obligations under the SBS arrangement?
Yes. The QDMTT continues to apply in all jurisdictions that have adopted it. GloBE Information Return reporting also continues. Only the IIR and UTPR are addressed by the SBS election.
Does the SBS Safe Harbor apply to 2024 and 2025?
No. The safe harbor is effective only from January 1, 2026. Groups remain fully subject to standard GloBE rules for 2024 and 2025, with the first filing deadlines approaching in 2026.
Can countries other than the US qualify for the SBS arrangement?
Yes. Any jurisdiction whose domestic and worldwide tax systems meet the eligibility criteria may request an OECD assessment. Assessment windows are available in 2026, 2027, and 2028. As of January 1, 2026, the US is the only jurisdiction listed in the OECD Central Record.
What changed when GILTI became NCTI?
The OBBBA, signed on July 4, 2025, renamed GILTI as Net CFC Tested Income under P.L. 119-21, Sec. 70323. The Section 250 deduction is set at 40% for tax years beginning after December 31, 2025, and the QBAI tangible asset exclusion is eliminated.
