On January 5, 2026, the OECD Inclusive Framework (IF) on Base Erosion and Profit Shifting (BEPS) released the highly anticipated Side-by-Side (SbS) package[1]. 

1. Introduction

The SbS package responds to the G7’s call[2] to reduce compliance burdens for in-scope multinational enterprises (MNE Groups) through simplification measures and to ensure fair treatment of substance-based tax incentives.

The SbS package introduces four new safe harbours and extends the Transitional CbCR Safe Harbour (TSH) by one year. The new safe harbours address three key areas:

• SbS System: The SbS Safe Harbour and the Ultimate Parent Entity (UPE) Safe Harbour
• Tax Incentives: The Substance-Based Tax Incentives (SBTI) Safe Harbour
• Material Simplifications: The Simplified Effective Tax Rate (ETR) Safe Harbour

Effective Dates:

• The SbS, UPE, and SBTI Safe Harbours apply from January 1, 2026.
• The Simplified ETR Safe Harbour applies from January 1, 2027, and in certain cases, from January 1, 2026.
• The TSH is extended by one year to Fiscal Years (FY) beginning on or before December 31, 2027 (but not including FY ending after June 30, 2029).

We have summarised the key highlights below.

2. SbS System

2.1) SbS Safe Harbour: IIR and UTPR Deemed to be Zero

For MNE Groups operating under a Qualified SbS regime, Top-up Tax (TuT) under the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR) shall be deemed to be zero. However, the Qualified Domestic Minimum Top-up Tax (QDMTT) will continue to apply.

The SbS Safe Harbour applies to MNE Groups with their UPE in a jurisdiction with a Qualified SbS regime. The assessment of the qualified status of an SbS regime will be made by the IF, upon request by a member jurisdiction.

The SbS Safe Harbour is not automatic, eligible MNE Groups must actively elect to apply it. Further, where the UPE of an MNE Group is located in a jurisdiction with a Qualified SbS regime and has made the election for this safe harbour to apply, the SbS Safe Harbour will apply to all the MNE Group’s Constituent Entities (CEs), including Stateless Entities, Minority Owned Constituent Entities (MOCEs), Partially Owned Parent Entities (POPEs) and Joint Ventures (JVs).

MNEs electing the SbS Safe Harbour must still file a GloBE Information Return (GIR) with an added election field in Section 1. However, they are exempt from completing Section 1.4 (high-level GloBE summary).

A&M: The United States is recognised as a Qualified SbS regime and has been added to the OECD’s Central Record for purposes of the Global Minimum Tax[3]. As a result, neither the IIR nor the UTPR applies to US headquartered MNE Groups for FYs commencing on or after January 1, 2026. As of January 5, 2026, no other country has been recognised as having a Qualified SbS regime. In practical terms, this means that US-headed groups may be exempt from both the IIR and the UTPR from 2026 onwards. However, this does not diminish the relevance of Pillar Two more broadly. QDMTTs are expected to remain a central feature of the Global Minimum Tax framework and, in most cases, will become the primary mechanism for its enforcement. The package reinforces the role of QDMTTs as the cornerstone for protecting domestic tax bases, particularly in developing countries, thereby further embedding Pillar Two within national tax systems rather than relying on a single, centralised global levy.

A Qualified SbS regime requires:

• An eligible domestic tax system.
• An eligible worldwide tax system.
• Foreign tax credit (FTC) availability for QDMTTs.

Key Conditions for an Eligible Domestic Tax System:

• Statutory corporate income tax (CIT) rate of at least 20%.
• A QDMTT or Corporate Alternative Minimum Tax (CAMT) at a nominal rate of at least 15%, aligned with minimum taxation objectives.
• No material risk of an ETR below 15% on domestic profits.

Key Conditions for an Eligible Worldwide Tax System:

• A comprehensive tax regime for resident corporations covering both active and passive income of foreign branches and controlled foreign companies (CFCs), with limited exclusions.
• Mechanisms to unilaterally address BEPS risks.
• No material risk of an ETR below 15% on foreign profits.

2.2) UPE Safe Harbour: UTPR Deemed to be Zero for the UPE Jurisdiction

For MNE Groups headquartered (i.e. with a UPE) in a jurisdiction with a Qualified UPE regime, the TuT under the UTPR shall be deemed to be zero for the UPE jurisdiction. A qualified status for UPE regimes is only available for pre-existing regimes as of January 1, 2026, the list of such jurisdictions will be published by the IF in due course. The UPE Safe Harbour effectively replaces the Transitional UTPR Safe Harbour which expired on December 31, 2025.

A&M: As of January 5, 2026, no jurisdiction has been recognised as having a Qualified UPE regime. MNE Groups are advised to maintain a watching brief on this.

A jurisdiction has a Qualified UPE regime if it achieves a minimum level of taxation for domestic profits by having an eligible domestic tax system. The requirements for an eligible domestic tax system mirror those for the SbS Safe Harbour:

• A nominal CIT rate of at least 20%.
• A QDMTT or CAMT with a nominal rate of at least 15%, that is consistent with minimum taxation objectives.
• No material risk that domestic operations of MNE Groups would be taxed below a 15% ETR (on the overall profits of the domestic operations of MNE Groups).

The UPE Safe Harbour will not affect the application of the IIR and/or UTPR regarding MNE Groups headquartered (with a UPE) in jurisdictions without a Qualified UPE Regime. It also will not affect the application of the IIR, UTPR or QDMTT for CEs located outside the UPE jurisdiction.

As with the SbS Safe Harbour, a jurisdiction’s Qualified UPE regime status will be determined by the IF upon request by a member jurisdiction, and GIR compliance will be required.

3) Substance-Based Tax Incentives (SBTI) Safe Harbour

The SBTI Safe Harbour eliminates the TuT  that would otherwise be attributable to Qualified Tax Incentives (QTIs). The QTI definition applies to two types of incentives:

• Expenditure-based incentives (e.g. tax credits and super-deductions).
• Certain production-based tax incentives (i.e. based on volume of tangible goods produced in a jurisdiction).

In both cases, the incentives must be linked to actual incurred expenditure or production.

The SBTI Safe Harbour will give rise to a jurisdictional ETR adjustment. QTIs will be treated as an increase to Covered Taxes, limited by a substance cap, calculated by either:

• 5.5% x greater of i) eligible payroll; or ii) depreciation and depletion expense recorded in Financial Accounting Net Income or Loss (FANIL) in respect of eligible tangible assets; or
• 1% x carrying value of eligible tangible assets (requires 5-year election).

Under the SBTI Safe Harbour, MNE Groups can elect to treat certain Qualified Refundable Tax Credits (QRTCs) and Marketable Transferable Tax Credits (MTTCs) as QTIs if this provides more beneficial treatment. In this case, the QRTCs/MTTCs are excluded from GloBE Income and treated as a reduction to Covered Taxes (subject to the substance cap). This election is only available for a QRTC or MTTC that meets the definition of a QTI.

In order for a tax incentive to be qualified as a QTI, it must be generally available to all taxpayers, not limited to in-scope MNE Groups. In addition, only incentives tied to real activity, such as incurred expenditure or actual production volumes, can be treated as QTIs for GloBE purposes.

A&M: Although intended to accommodate substance-based tax incentives, the SBTI Safe Harbour operates within a narrowly defined and highly conditional framework. Its design reflects Pillar Two’s policy objective of recognising such incentives only where they are closely and demonstrably linked to sustained economic activity.

4) Simplified ETR Safe Harbour

The Simplified ETR Safe Harbour offers an updated method to calculate jurisdictional ETR using financial reporting data with minimal adjustments, and applies on a Tested Jurisdiction basis. It will be mandatory for jurisdictions to introduce the Simplified ETR Safe Harbour from 2027, with optional early adoption in 2026 in certain cases. Whilst the current TSH operates on a once-out, always-out basis, the Simplified ETR Safe Harbour affords greater flexibility for MNE Groups to opt-in or out, see our comments regarding Entry and Re-entry Criteria below.  

Under this safe harbour, TuT is deemed to be zero for a jurisdiction (Tested Jurisdiction) if its simplified ETR is at least 15%. The simplified ETR is calculated by dividing Simplified Taxes by Simplified Income, using financial reporting data used to prepare the MNE Group’s Consolidated Financial Statements (CFS), with certain adjustments:

• Simplified Income: Starts from Jurisdictional Profit Before Tax (JPBT) and then considers four adjustments:
  • Basic Adjustments: Remove excluded dividends, equity gains or losses, add back fines and penalties.
  • Industry-Specific Adjustments: For financial and shipping industries, respectively. 
  • Conditional Adjustments: For equity reported items and purchase price allocation (PPA) adjustments.
  • Optional Adjustments: Including Asymmetric Foreign Exchange Gain/Loss and Accrued Pension Expense elections.
• Simplified Taxes: Starts from Jurisdictional Income Tax Expense (JITE) with basic and optional adjustments; includes treatment for negative taxes.
  • Basic Adjustments: Remove any amounts not considered Covered Taxes, exclude tax expenses related to income not included in Simplified Income, adjust for taxes that are not certain to be paid and deferred tax adjustments.
  • Deferred tax expenses related to DTLs subject to 5-year recapture provisions are excluded from simplified calculations.  DTLs not subject to the recapture provisions (i.e. recovery allowance on tangible assets, capitalized research and development) are included in the calculation.
  • Adjustments are made on judgemental areas, including movement in deferred tax recognition and uncertain tax positions which are disregarded in the simplified calculations.
  • Simplified Adjustments for Negative Taxes: Arises when negative Simplified Taxes are less than Simplified Loss x Minimum Rate (15%). The Simplified Adjustment for Negative Taxes is the negative amount of the difference and is carried forward in the computation of Simplified Taxes. As an alternative, the MNE Group may elect to apply the Loss DTA Adjustment instead of the standard negative tax adjustment under certain conditions.
  • Optional Adjustments: MNE Groups may elect to include Covered Taxes accrued as an expense but not reflected in income tax expense in the financial accounts and Covered Taxes related to equity-reported items. MNE Groups can also elect to include unused QRTCs/MTTCs carried forward from prior years, subject to certain conditions.

Other key features of the Simplified ETR Safe Harbour include:

• Accounting Standards
  • QDMTT Jurisdictions which currently require Local Financial Accounting Standards (LFAS) for QDMTT calculations may provide an election for MNE Groups to perform the Simplified ETR Safe Harbour computations using any Authorised Financial Accounting Standard that the jurisdiction’s tax administration is familiar with or considers sufficiently similar to the LFAS.
  • The IF will collect and publish a list of the Authorised Financial Accounting Standards that would be allowed for purposes of the Simplified ETR Safe Harbour in each respective QDMTT LFAS Jurisdiction.
• M&A Simplification
  • Special rules apply to the computation of Simplified Income and Simplified Taxes when there has been a M&A transaction.
  • The M&A Simplification removes the requirement to exclude PPA adjustments (subject to certain exceptions) from the computation of Simplified Income and Simplified Taxes. The M&A Simplification applies when the tax basis of transferred assets (excluding goodwill) and liabilities remains unchanged post M&A transaction, and related deferred tax assets or liabilities are accrued at or above the Minimum Rate.
• SBTI Interaction
  • Adjustments to GloBE Income and Adjusted Covered Taxes under SBTI apply equally to the computation of Simplified Income and Simplified Taxes.
• Year End Tax Adjustments
  • The Simplified ETR Safe Harbour generally does not require an MNE Group to adjust its Simplified Taxes to take account of the true-up adjustments to income or taxes that occur after year end – such adjustments are included in the year in which they are accrued, subject to certain exceptions.
  • However, an MNE Group may make a 5-year election to include increases or decreases in Covered Tax liability and income (excluding transfer pricing adjustments – see below) that accrue within 12 months of the end of the transaction year. This election applies to all jurisdictions in which the MNE Group operates.
• Transfer Pricing Adjustments
  • The Simplified ETR Safe Harbour provides the option for an MNE Group to make a 5-Year election to include transfer pricing (TP) taxable income adjustments and any related differences in Covered Tax liabilities that accrue within 12 months of the end of the FY for which the TP taxable adjustments are made as adjustments to the JPBT and JITE.
  • This election is applicable to TP adjustments in all jurisdictions in which the MNE Group operates.
• Permanent Establishment (PE) Simplification Election
  • Under the PE Simplification Annual Election (to be made on a jurisdictional basis), the Simplified Income or Loss of each PE is included in the Simplified Income or Loss of the Main Entity’s Tested Jurisdiction to the extent it is treated as income or loss in the computation of the domestic taxable income under the taxable branch regime in the Main Entity jurisdiction. 
  • Similarly, the Main Entity’s current and deferred taxes related to the income or loss of those PEs as determined under the tax legislation are included in the Simplified Taxes of the Main Entity’s Tested Jurisdiction.
• Entry and Re-Entry Criteria
  • First Time Election: An MNE Group may elect the Simplified ETR Safe Harbour if it had no TuT liability in the Tested Jurisdiction in each FY beginning within 24 months before the first day of the FY for which the Simplified ETR is elected (i.e. no TuT in the Tested Jurisdiction in the preceding two FYs).
  • Annual Election: Assuming they remain eligible, MNE Groups may elect the Simplified ETR Safe Harbour year after year.
  • Re-Entry: If the MNE Group did not elect for Simplified ETR Safe Harbour for a FY or was ineligible, re-election is only permitted if the MNE Group had no TuT liability in the Tested Jurisdiction in every FY beginning within 24 months of the first day of the FY for which the Safe Harbour was not elected/ineligible.
• Integrity Rules
  • The Simplified ETR Safe Harbour includes integrity requirements to ensure consistency with the GloBE Model Rules. An MNE Group is eligible only if its Simplified Income and Simplified Taxes calculations comply with these principles:
    • Matching Principle: Intragroup income is not recognised in an FY later than that in which the corresponding intragroup expense is recognised. Further, the amount of intragroup income must match the corresponding intragroup expense.
    • Full Allocation Principle: All profit or loss is allocated to a Tested Jurisdiction.
    • Single Expense and Loss Principle: Each expense and loss is deducted only once and in a single Tested Jurisdiction; and
    • Single Tax Principle: Taxes are only recorded once and in a single Tested Jurisdiction.
• Applicability Date
  • The Simplified ETR Safe Harbour must be made available for all FYs beginning on or after 31 December 2026. 
  • Jurisdictions may, however, make the Simplified ETR Safe Harbour available to MNE Groups for FYs beginning on or after 31 December 2025 where certain conditions are met. 

A&M: Despite its intended role as a simplification measure, the Simplified ETR Safe Harbour remains highly technical, incorporating numerous adjustments, elections and integrity requirements that closely align with the core Pillar Two framework. While the simplified calculations are designed to reduce record-keeping burdens, including aspects of deferred tax accounting, robust legal-entity and jurisdictional deferred tax processes (CFS & LFAS) continue to underpin the computation. In practice, the ability to leverage consolidated financial statement data may streamline reporting for some MNE Groups, but the overall compliance effort is unlikely to differ materially from the standard approach.

5) Extension of Transitional CbCR Safe Harbour

The Transitional CbCR Safe Harbour has been extended for one additional year, to FYs beginning on or before 31 December 2027 but not including a FY that ends after 30 June 2029. The same ETR rate of 17% that was already applicable for FY 2026 remains applicable for this additional year.

6) Other Updates

The Central Record has been updated to reflect the qualified status of the GloBE legislation of the following jurisdictions: Hong Kong (IIR and QDMTT); Qatar (IIR and QDMTT) and Bahrain (QDMTT).

7) Next Steps for Simplification

In the near term, the IF will undertake work on the permanent routine profit test and de minimis test expected to be concluded by the first half of 2026. Other additional simplifications to be concluded within this period include streamlining reporting obligations which may involve adaptations to the GIR, the GIR XML Schema and the related validation rules to apply the agreed safe harbours.

8) Stocktake

Looking ahead, the SbS package commits to a comprehensive stocktake by 2029 to assess any level playing field risks deriving from the impact of the SbS system. The stocktake will consider data on the impact of the GMT and the SbS system, including the level of QDMTT implementation, competitive elements among MNE Groups and taxpayer trends such as profit-shifting through corporate inversions or increased profits in low-tax jurisdictions without QDMTTs.