Taxwriters cheer OECD Pillar 2 deal but will watch implementation

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On Jan. 5, 2026, the OECD Inclusive Framework released significant administrative guidance, dubbed the side-by-side package, intended to resolve long-running uncertainty over how the Pillar 2 Global Anti-Base Erosion (GloBE) rules will apply to U.S. multinational enterprise (MNE) groups. In line with an agreement reached between the U.S. and other G7 countries last summer, a new safe harbor will effectively deem the U.S. tax system compliant with Pillar 2 and exempt U.S. MNE groups from certain top-up taxes beginning in 2026.

Republican tax leaders on Capitol Hill praised the U.S. Treasury Department’s negotiation of the agreement, calling it a “landmark step in reversing Democrats’ global tax surrender,” but warned that they will closely watch implementation by jurisdictions around the globe.

In addition to introducing the new side-by-side framework, the OECD package also extends the transitional country-by-country reporting (CbCR) safe harbor by one year and introduces a permanent simplified effective tax rate safe harbor, along with a new substance-based tax incentive safe harbor.

For U.S. MNE groups, the headline development is the side-by-side (SbS) safe harbor, which limits the application of certain Pillar 2 taxes where the Inclusive Framework determines that a domestic tax regime has similar policy objectives, overlapping scope and a complementary policy impact to the global minimum tax regime.

This framework is intended to exempt qualifying jurisdictions from the income inclusion rule (IIR) and undertaxed profits rule (UTPR) that could otherwise apply solely because the ultimate parent jurisdiction has not implemented the GloBE rules. Currently, the U.S. is the only jurisdiction listed in the OECD’s Central Record as having a qualified regime for purposes of the SbS safe harbor.

How we got here

Following the OECD/G20 Inclusive Framework’s October 2021 agreement on a two-pillar solution and the subsequent design of the GloBE rules, many jurisdictions implemented Pillar 2 starting in 2024, with UTPR adoption occurring shortly thereafter. The U.S. originally agreed to the Pillar 2 framework but did not ultimately pass legislation implementing the GloBE rules, creating a structural tension.

However, the U.S. continues to operate a comprehensive international tax regime — including the net CFC tested income (NCTI) (previously global intangible low-taxed income, or GILTI), corporate alternative minimum tax (CAMT) and other related systems — that reflects similar policy objectives to Pillar 2, overlaps significantly in scope, and produces a complementary minimum tax outcome.

Pillar 2 was designed on the assumption that all jurisdictions would implement the framework. As a result, the Model Rules include the IIR and the UTPR designed to ensure that minimum taxes are collected when they are not imposed by the ultimate parent entity’s jurisdiction. Because the U.S. did not implement GloBE, those mechanisms applied to U.S. MNEs even though U.S. policymakers — and particularly the Trump administration — argued that the country’s tax rules were already achieving the same policy result. The result was duplicative taxation, inefficiencies and an increased compliance burden for U.S. MNE groups.

The new package also reflects broader international policy negotiations during 2025, following growing concerns about how Pillar 2 could apply to U.S. MNE groups when it was clear that neither Congress nor the Trump administration would allow U.S. adoption of the GloBE rules. The new guidance is intended to deliver the outcome agreed to by the U.S. and the G7 in June 2025, which paired development of a side-by-side system with the removal of threatened U.S. retaliatory tax measures (namely the legislative proposal known as Section 899).

Against that backdrop, the side-by-side package represents the OECD’s practical roadmap for how the global minimum tax will operate for U.S. MNEs going forward, including how the GloBE system is intended to coexist with the U.S. federal income tax system, while maintaining the OECD’s stated focus on ensuring guardrails against low-tax outcomes.

Congressional reaction

In a joint statement following the OECD’s announcement, Senate Finance Committee Chair Mike Crapo, R-Idaho, and House Ways and Means Committee Chair Jason Smith, R-Mo., characterized the side-by-side system as one “respecting U.S. tax sovereignty.” But the two taxwriting leaders, who agreed last June to remove Section 899 from the GOP’s massive tax and spending bill, have not necessarily written off the so-called “revenge tax.”

“We warned at the time that we stand ready to revive retaliatory measures if other parties slow-walk implementation of that agreement,” Crapo and Smith said. “That warning remains today as the work to implementing this milestone now begins.”

Rep. Ron Estes, R-Kan., who sits on Ways and Means and was a key figure in the development of Section 899, similarly welcomed the new framework as “clear and meaningful progress” while warning that Congress “must trust but verify” to ensure “real-world compliance, not just written assurances.”

While the side-by-side safe harbor is the most significant element of the framework for U.S. MNEs, the other extended, modified and new safe harbors also address arguments that legislators have made on behalf of the U.S. business community. 

How the rubber meets the road

The more than 140 jurisdictions around the world that are part of the Inclusive Framework will have varying processes to implement the new package, and this will take time to play out. The SbS safe harbor is intended to take effect for fiscal years beginning on or after Jan. 1, 2026, but that may not be the case everywhere.

For example, the U.K. has announced that measures to apply it into law there will be subject to technical consultation and introduced in the next finance bill, usually released in draft form around mid-year and finalized by year-end. However, the law will apply as of Jan. 1, 2026, as envisioned by the SbS deal. In contrast, the European Commission has suggested that a notice it issued Jan. 12 will deem the SbS system law as of that date in all 27 European Union states without each needing to pass new legislation to enact the changes.

Other countries may take until later in 2026 or even into 2027 to enact legislation, and the effective date may not be retroactive.

A more detailed analysis by Grant Thornton of the various elements of the side-by-side package is available here.