Pillar Two Side-by-Side Package 2026

Why a Side-by-Side Package Was Needed

When over 50 countries implemented the OECD's GloBE Model Rules (BEPS Pillar Two) starting January 1, 2024, they created a structural tension: the world's largest economy — the United States — was not participating. The US had its own international minimum tax in GILTI (now NCTI under the OBBBA), but the OECD had not recognized NCTI or BEAT as a qualified domestic minimum top-up tax (QDMTT). This meant that US-parented multinationals could face UTPR top-up tax charges from EU, UK, and other jurisdictions on their US-source income — taxing it twice at the minimum tax floor.

The political and legal stakes were high. Multiple US trade partners faced retaliation threats under Section 899 of the OBBBA if they applied the UTPR against US companies. Major US corporations — including technology, pharmaceutical, and financial services firms — lobbied both Washington and OECD member governments to create a coordination mechanism. The January 2026 Side-by-Side Package is the OECD's response.

What the Side-by-Side Package Contains

The Side-by-Side Package is a set of OECD administrative guidance (not binding law, but typically incorporated into domestic legislation by adopting countries) that consists of three main components:

1. A US-specific GloBE Safe Harbour: A mechanism allowing US-parented groups to be treated as satisfying the 15% GloBE minimum for their US-source income, subject to conditions based on the NCTI effective tax rate and applicable FTC credits.
2. Modified UTPR Rules for US-Source Income: Guidance limiting the scope of the UTPR for other jurisdictions when applied to income of US constituent entities, balancing the revenue interests of UTPR-implementing countries against the risk of triggering US Section 899 retaliation.
3. NCTI and BEAT Coordination Rules: Technical rules specifying how NCTI and BEAT payments are to be treated within the GloBE ETR computation — clarifying how these US taxes are allocated across the group's jurisdictional ETR positions.

The US GloBE Safe Harbour: How It Works

The US GloBE Safe Harbour is a conditional mechanism: if a US-parented MNE group meets specific criteria, the GloBE rules treat the US constituent entities as subject to a "qualified" minimum tax, preventing other jurisdictions from imposing UTPR top-up taxes on US-source income. The conditions are:

Condition 1: NCTI Effective Rate ≥ 12.6%

The group's US entities must, in aggregate, pay US tax at an effective rate equal to or above the OBBBA NCTI rate (12.6%). Because the NCTI rate is below the 15% GloBE floor, this condition alone does not satisfy the GloBE minimum — it is a threshold for safe harbour access, not a full waiver.

Condition 2: Blended Rate Test

The Safe Harbour requires that the combined US federal and state effective tax rate on US-source income equals or exceeds 15% when both regular corporate income tax and NCTI obligations are considered on a blended basis. For many US-headquartered corporations that also have state taxes (average combined state corporate rate is approximately 4–6%), the blended rate can approach or exceed 15%, satisfying this condition.

Condition 3: No Structured NCTI Avoidance

The Safe Harbour contains an anti-avoidance rule: it does not apply if the group has entered into arrangements specifically designed to reduce the NCTI base in a way that would not occur in an arm's length context. This targets structures that artificially inflate QBAI or manipulate the tested income calculation without genuine substance.

Effect of the Safe Harbour

Where the Safe Harbour applies, other jurisdictions that have adopted the Side-by-Side Package agree not to impose UTPR top-up taxes on US constituent entity income. Critically, this is a bilateral mechanism — it only works in jurisdictions that have legislatively adopted the Package. Jurisdictions that have not adopted it retain the legal right to impose UTPR top-up taxes on US-source income, though doing so risks triggering Section 899 retaliation.

UTPR Rules for Non-US MNEs

The Side-by-Side Package also clarifies the UTPR position for non-US multinationals — those with a parent outside the US but with US subsidiaries or branches. These groups face a different set of considerations.

Non-US Groups with US Subsidiaries

For a non-US parent group, US subsidiaries are constituent entities subject to the standard GloBE rules. Their ETR is computed using actual US corporate income tax paid plus any BEAT liability (to the extent BEAT functions as a covered tax in the calculation). Because the standard US corporate rate is 21%, most US subsidiaries with normal operating margins will have a GloBE ETR above 15%, and no top-up tax is required for them.

However, US subsidiaries that benefit from significant accelerated depreciation, R&D credits, or other tax incentives may compute a GloBE ETR below 15%. The QDMTT safe harbour does not apply to these US entities (since the US has no QDMTT), so the parent's jurisdiction or other group member jurisdictions may need to impose top-up tax on those US entities' undertaxed income.

UTPR Allocation Among Group Members

Under the Side-by-Side Package, UTPR top-up tax on non-US-parent group US income is allocated among the group's constituent entities proportional to their payroll and tangible assets, consistent with standard GloBE UTPR mechanics. The Package does not create any preferential allocation for US subsidiaries — they are treated like any other low-ETR constituent entity in a UTPR computation.

How NCTI and BEAT Are Treated in the GloBE Computation

The third component of the Side-by-Side Package provides technical guidance on treating NCTI and BEAT as "covered taxes" within the GloBE ETR computation. This has been one of the most technically contested issues in Pillar Two since implementation began.

NCTI as a Covered Tax

NCTI is treated as a covered tax in the GloBE computation to the extent it relates to income of the US constituent entities. The allocation of the NCTI liability across different jurisdictions follows the OECD's model for allocating blended CFC taxes — using the ratio of each CFC's tested income to total tested income. This means a group with one high-earning CFC in a low-tax jurisdiction will allocate most of the NCTI liability to that CFC's jurisdiction, potentially bringing its GloBE ETR closer to 15%.

BEAT as a Covered Tax

BEAT is treated as a partially covered tax. Because BEAT is computed on a modified gross basis (adding back base-eroding payments), only the portion attributable to income — rather than the gross payment adjustment — qualifies as a covered tax for GloBE purposes. The Package provides a safe calculation methodology for determining the covered portion of BEAT, avoiding the need for costly entity-level analysis.

Which Countries Have Adopted the Side-by-Side Package?

Planning Strategies Under the Side-by-Side Package

1. Run the Blended Rate Test Before Year-End

The Safe Harbour's blended rate test (combined US federal + state rate ≥ 15%) should be modelled mid-year. If state apportionment changes or federal deductions reduce the effective rate below 15%, consider accelerating taxable income into the current year or limiting accelerated depreciation elections to keep the blended rate above the threshold.

2. Document the Safe Harbour Election Process

In each jurisdiction where the group has adopted the Package, work with local counsel to establish the annual Safe Harbour election filing process. Missing the deadline — often aligned with the GloBE information return filing deadline — forfeits protection for that year.

3. QBAI Planning for High-NCTI Subsidiaries

For CFC subsidiaries that generate substantial tested income, confirm QBAI allocations accurately reflect tangible asset bases. Where CFC ETRs are below 7% (the level where the NCTI covers less than 12.6% effective rate), consider whether substance investments can be increased to reduce NCTI inclusion via higher QBAI.

4. Monitor Non-Adopting Jurisdictions

Singapore and Hong Kong have not adopted the Side-by-Side Package. Groups with significant operations in these jurisdictions should monitor whether local UTPR rules could still apply to US-parent group income. Section 899 retaliatory exposure is also relevant here — determine whether operations in these jurisdictions involve payments that could trigger Section 899 if the US designates them as discriminatory.

5. Non-US Parent Groups: Review US Subsidiary ETRs

If your group has a non-US parent with US subsidiaries, the Safe Harbour does not apply to you. Review each US subsidiary's projected GloBE ETR and identify those most likely to fall below 15% due to credits or timing differences. Pre-plan whether any UTPR top-up taxes will be imposed in your parent jurisdiction.

Frequently Asked Questions

Is the Side-by-Side Package legally binding?

No. The OECD's Side-by-Side Package is administrative guidance — it becomes binding only when individual countries incorporate it into domestic legislation. As of May 2026, the UK, Canada, and Japan have formally adopted it; the EU is in the process of amending its Pillar Two directive to include the Package's provisions.

Does the Safe Harbour mean the US is now participating in Pillar Two?

No. The US has not adopted the GloBE Model Rules and has not implemented a QDMTT. The Safe Harbour is a coordination tool — it prevents other countries from imposing UTPR on US-parent group income, but it does not make the US a formal Pillar Two participant. US-parented groups are still not subject to the IIR or UTPR domestically.

What happens if a jurisdiction has not adopted the Package and imposes UTPR on US-parent group income?

That jurisdiction risks triggering US Section 899 retaliation, which could increase withholding tax rates on payments to that country's residents by up to 5 percentage points above treaty rates. Whether Treasury designates a specific country depends on Treasury's published guidance and the bilateral diplomatic context.

Can a non-US parent group rely on the Safe Harbour?

No. The Safe Harbour protects US-parent groups from UTPR charges on their US-source income. Non-US parent groups with US subsidiaries are subject to standard GloBE rules and cannot access the Safe Harbour.