On January 5, 2026, the OECD released the administrative guidance known as the Side-by-Side package, implementing the G7's June 28, 2025 political agreement to provide relief for US-parented multinational groups from Pillar Two's Income Inclusion Rule and Undertaxed Profits Rule. The United States is the only jurisdiction currently listed on the OECD Central Record as having a Qualified SbS Regime.
What the SbS package does and does not do needs to be stated precisely before anything else.
It does: allow US-parented MNE groups to elect a deemed top-up tax of zero under both the IIR and UTPR for all jurisdictions, domestic and foreign, for fiscal years beginning on or after January 1, 2026.
It does not: eliminate Pillar Two for 2024 or 2025 (full GloBE compliance is still required for those years), exempt US subsidiaries from Qualified Domestic Minimum Top-Up Taxes (QDMTTs) imposed by the jurisdictions where they operate, or eliminate the GloBE Information Return filing obligation.
For the US multinational CFO, the practical consequence is a bifurcated Pillar Two compliance picture in 2026: the FY2024 GIR filing is due now (calendar-year groups, June 30, 2026 was the first general deadline), FY2025 compliance needs to be resolved before the SbS election takes full effect for FY2026, and the FY2026 provision must be prepared with the SbS election reflected in ASC 740 while also accounting for QDMTT obligations in implementing jurisdictions.
This post covers exactly what the SbS Safe Harbor is and how to elect it, what the UPE Safe Harbor is and when you would use it, what the Simplified ETR Safe Harbor does for 2026 and 2027, how QDMTTs are treated under ASC 740, what the GIR XML filing deadline is, and what the 2026 ASC 740 annual report disclosure requirements are for Pillar Two.
What Is the OECD Pillar Two Side-by-Side Package and Why Does It Matter for US Companies?
Pillar Two is the OECD's Global Anti-Base Erosion (GloBE) framework, designed to ensure that large MNE groups pay a minimum effective tax rate of 15% on a per-jurisdiction basis. The GloBE rules operate through an interlocking system: the QDMTT allows the jurisdiction where the low-taxed income arises to collect the top-up tax first, the IIR allows the parent jurisdiction to collect any remaining top-up tax from high-level subsidiary income, and the UTPR operates as a backstop collecting residual top-up tax from other jurisdictions that have adopted a qualified UTPR.
The problem for US-parented groups was structural. US tax law, including BEAT, GILTI (now NCTI under the OBBBA), and the corporate alternative minimum tax (CAMT), was designed to tax domestic and foreign income at rates that do not always satisfy the per-jurisdiction 15% GloBE minimum, particularly for low-taxed subsidiaries in jurisdictions where the QDMTT has not been implemented. This left US groups exposed to IIR and UTPR top-up taxes imposed by foreign jurisdictions that had adopted Pillar Two.
The G7 reached a political agreement on June 28, 2025, that the existing US tax regime was sufficiently robust to exempt US-headed groups from the IIR and UTPR. The OECD translated that political agreement into administrative guidance on January 5, 2026, in the Side-by-Side package.
The United States qualifies as a Qualified SbS Regime because it satisfies three criteria confirmed in the package:
It has an eligible domestic tax system: a statutory nominal corporate rate of at least 20% plus a QDMTT or CAMT based on financial statement income at a nominal rate of at least 15%. The US CAMT (at 15% on adjusted financial statement income) satisfies this criterion, even though not every Pillar Two in-scope MNE group is subject to CAMT.
It has an eligible worldwide tax system: rules that impose minimum tax requirements on foreign income. The US GILTI/NCTI regime satisfies this criterion as a worldwide minimum tax on CFC income.
It provides a foreign tax credit for QDMTTs on the same terms as other creditable covered taxes.
The package is not self-executing in every jurisdiction. Each Inclusive Framework member that has adopted GloBE rules must legislate the SbS safe harbor into its own domestic law before it can be effective. If a jurisdiction has not implemented the SbS framework domestically, the IIR or UTPR may still apply in that jurisdiction even against a US-parented group, pending the domestic legislative adoption.
What Is the Side-by-Side Safe Harbor and How Does a US Parent Elect It?
The SbS Safe Harbor allows an MNE group whose UPE is in a Qualified SbS Regime jurisdiction to elect a deemed top-up tax of zero under both the IIR and UTPR for all jurisdictions in a fiscal year. The election is group-wide: it applies to all constituent entities, including stateless entities, minority-owned entities, partially owned parent entities, joint ventures, and JV subsidiaries. There is no jurisdiction-by-jurisdiction option.
The election is made by the filing constituent entity in the GloBE Information Return. The specific election mechanics are set out in the SbS package. For calendar-year MNE groups, the FY2026 GIR is the first filing cycle in which the SbS election can be made.
To be eligible to elect the SbS Safe Harbor, the MNE group must meet three conditions:
The UPE must be located in a jurisdiction listed in the OECD Central Record as having a Qualified SbS Regime. As of July 2026, the United States is the only such jurisdiction.
The MNE group must be in-scope for Pillar Two (consolidated group revenues exceeding EUR 750 million in at least two of the four fiscal years preceding the fiscal year in question).
The election must be timely made in the GIR for the fiscal year.
Several important limitations apply even when the SbS Safe Harbor is elected:
QDMTTs remain fully applicable. The SbS election exempts from IIR and UTPR but does not affect a jurisdiction's right to impose its own QDMTT. US subsidiaries in countries that have enacted QDMTTs remain subject to those taxes.
The SbS Safe Harbor does not apply retroactively. FY2024 and FY2025 require full GloBE compliance.
If a foreign jurisdiction has not yet enacted the SbS framework into its domestic law, that jurisdiction may still impose IIR or UTPR on US-parented constituent entities during the period before domestic adoption. The Loyens and Loeff analysis is explicit: "if jurisdictions cannot implement the rules from 1 January 2026, the IIR or UTPR may still (partially) apply during 2026."
For ASC 740 purposes, the SbS election changes the expected top-up tax from a potentially significant IIR/UTPR liability to zero, but only after the election is made and only in jurisdictions that have adopted the SbS framework domestically. For the 2026 provision, the tax director must assess whether each material jurisdiction has adopted the SbS framework into local law and whether the IIR/UTPR is therefore extinguished or still potentially live pending domestic adoption.
What Is the UPE Safe Harbor and When Would You Choose It Instead?
The UPE Safe Harbor is a separate, narrower relief mechanism introduced in the same package. It applies for fiscal years beginning on or after January 1, 2026, and effectively replaces the transitional UTPR Safe Harbor that expired at end of 2025.
The UPE Safe Harbor requires a Qualified UPE Regime: a jurisdiction with an eligible domestic tax system (the same domestic tax criteria as the SbS Safe Harbor) but without necessarily satisfying the worldwide tax system criteria. Where the UPE Safe Harbor applies, the UTPR top-up tax attributable to the UPE jurisdiction is deemed to be zero, but only for the UPE jurisdiction. The IIR and UTPR for non-UPE jurisdictions are not affected.
As of the package's release on January 5, 2026, no jurisdiction had been listed in the Central Record as a Qualified UPE Regime. The OECD indicated that jurisdictions could request assessment in the first half of 2026.
For US-parented groups specifically, the UPE Safe Harbor is not necessary: the SbS Safe Harbor provides full IIR and UTPR exemption across all jurisdictions, making the narrower UPE Safe Harbor redundant. The UPE Safe Harbor is designed for groups headquartered in jurisdictions that satisfy the domestic but not the worldwide tax criteria, a category that does not currently include the US.
The practical relevance of the UPE Safe Harbor for US multinationals is limited. The category of taxpayer most likely to use it is a non-US parent company whose home jurisdiction has a robust domestic corporate tax system but no worldwide minimum tax comparable to GILTI/NCTI. If a US-parented group has intermediate parent entities in jurisdictions that may qualify as Qualified UPE Regimes, those IPEs may benefit from the UPE Safe Harbor for their own domestic profits, but the US parent's SbS election generally provides broader relief.
What Is the Simplified ETR Safe Harbor and the 17% Threshold for 2026?
The Simplified ETR Safe Harbor is a new permanent safe harbor introduced by the SbS package that is distinct from both the SbS and UPE safe harbors. It is relevant to all in-scope MNE groups, not just those with US UPEs.
The Simplified ETR Safe Harbor allows MNE groups to determine their GloBE ETR using a simplified calculation based on the income and taxes from the group's reporting packages, with some adjustments. The full GloBE calculation, which requires extensive GloBE-specific accounting adjustments, is resource-intensive. The Simplified ETR Safe Harbor allows groups to use their existing accounting data with specified simplifications, avoiding the need to run a full GloBE calculation in jurisdictions where the safe harbor applies.
The threshold for 2026 and 2027 is a simplified ETR of at least 17% at the jurisdictional level. The Sullivan and Cromwell analysis of the package confirms this: the Simplified ETR Safe Harbor allows an MNE group's ETR to be determined pursuant to a less complex calculation based on existing account systems with some adjustments, designed to limit ETR volatility through simplifications, optional adjustments, and consistency requirements.
The Simplified ETR Safe Harbor is available from 2027 by default, but jurisdictions can elect to apply it from 2026. It is intended to become the permanent replacement for the transitional Country-by-Country Reporting Safe Harbor (TCSH), which has been extended by one year through FY2027 (for calendar-year groups). During the overlap period (2026 and 2027), MNE groups may have both the TCSH and the Simplified ETR Safe Harbor available in some jurisdictions, and the better outcome depends on the specific jurisdictional facts.
The BDO analysis flags an important practical consideration: most tax engines today are configured for full GloBE calculations rather than simplified ETR calculations, and adapting them for the simplified ETR approach may take some time. Employers should not assume the Simplified ETR Safe Harbor is immediately accessible from their existing systems without verification.
For US-parented groups that elect the SbS Safe Harbor, the Simplified ETR Safe Harbor may still be relevant for QDMTT compliance in jurisdictions where a simplified ETR calculation is available.
Which Jurisdictions Still Impose QDMTTs on US Subsidiaries and How Do You Account for Them Under ASC 740?
This is the most critical practical question for the 2026 ASC 740 provision. The SbS election eliminates IIR and UTPR exposure. It does not eliminate QDMTT exposure.
A QDMTT is a domestic minimum top-up tax imposed by a jurisdiction on income arising in that jurisdiction, calculated under GloBE rules. It is designed to allow the source jurisdiction to collect the top-up tax on locally arising income before the parent jurisdiction collects it via IIR. As of 2026, jurisdictions that have enacted QDMTTs include EU member states (most of which have adopted Pillar Two through the EU Minimum Tax Directive), the UK, South Korea, Japan, Australia, Canada, and several other implementing jurisdictions.
For a US multinational with subsidiaries in EU member states, the UK, or other QDMTT jurisdictions, the 2026 ASC 740 provision must reflect any QDMTT liability in those jurisdictions, even though the IIR and UTPR have been eliminated by the SbS election.
ASC 740 treatment of QDMTTs: the IASB's May 2023 guidance and the FASB's ASC 740-10 guidance are relevant here. ASU 2023-09 (Income Tax Disclosures) does not specifically address Pillar Two accounting, but the general ASC 740 framework applies: QDMTTs are income taxes under ASC 740 to the extent they are based on income. The Baker Tilly Pillar Two ASC 740 guide (February 2026) confirms that QDMTTs are generally accounted for as income taxes under ASC 740, with current tax expense recognised when the QDMTT is triggered and deferred tax assets and liabilities recognised for temporary differences that affect the QDMTT base.
The QDMTT calculation is a per-jurisdiction GloBE ETR calculation. A US subsidiary in a QDMTT jurisdiction has a QDMTT liability if its jurisdictional GloBE ETR is below 15%. The GloBE ETR is not the same as the ASC 740 effective tax rate for that subsidiary: it uses GloBE-adjusted financial statement income rather than taxable income, with specific adjustments for covered taxes and substance-based income exclusions.
For the 2026 provision, the tax team needs to:
Identify each jurisdiction where a US subsidiary operates that has an enacted QDMTT.
Calculate the jurisdictional GloBE ETR for each such jurisdiction to determine whether a QDMTT liability exists.
Reflect any QDMTT liability as a current income tax expense under ASC 740.
Assess whether any deferred tax assets or liabilities arise from temporary differences in the QDMTT base that are expected to reverse in future periods.
Include the QDMTT impact in the rate reconciliation under ASU 2023-09, separately identifying material QDMTT amounts.
What Is the Substance-Based Tax Incentive Safe Harbor for R&D Credits?
The Substance-Based Tax Incentive (SBTI) Safe Harbor is another element of the SbS package relevant to groups with significant R&D tax incentives in their operations.
Under the base GloBE rules, refundable tax credits that are Qualified Refundable Tax Credits (QRTCs) are included in covered taxes, increasing the GloBE ETR. Non-refundable tax credits generally reduce covered taxes, decreasing the GloBE ETR. For jurisdictions where R&D credits or other substance-based incentives reduce covered taxes below the 15% threshold, this can trigger top-up tax liability.
The SBTI Safe Harbor addresses this by allowing a portion of certain substance-linked incentives (specifically those tied to R&D, green transition, or key-sector activities) to be treated as covered taxes rather than as income, thereby increasing the GloBE ETR. The specific mechanics of which incentives qualify and how much can be counted toward covered taxes are set out in the SbS package.
For US multinationals with significant US R&D credits (Section 41 R&D credit) or with subsidiaries in jurisdictions offering substantial R&D incentives, the SBTI Safe Harbor is worth modelling. The BDO analysis notes that the SBTI Safe Harbor "generally allows a portion of such incentives to be treated as covered taxes, thereby increasing the ETR." The Sullivan and Cromwell analysis describes it as applicable "from 2026."
The interaction between the SBTI Safe Harbor and the SbS election is additive: a US-parented group that elects the SbS Safe Harbor still benefits from the SBTI Safe Harbor in calculating QDMTT liabilities in jurisdictions where R&D or other substance-based incentives affect the jurisdictional GloBE ETR.
What Is the GloBE Information Return and What Is the 2026 XML Filing Deadline?
The GloBE Information Return (GIR) is the standardised reporting form through which MNE groups report their GloBE calculations to implementing jurisdictions. It contains jurisdictional-level data on constituent entities, covered taxes, GloBE income or loss, substance-based income exclusions, and safe harbor elections.
Filing obligation: MNE groups that are in scope for Pillar Two must file a GIR in any jurisdiction that has adopted a GIR filing requirement. The filing obligation applies even when the SbS Safe Harbor is elected, though the SbS election reduces the scope of GIR content required.
The OECD released the GIR XML Schema v1.0 in June 2026 specifically for the first filing cycle. This XML schema is the technical standard that must be used when submitting GIR data electronically to implementing jurisdictions. For groups whose FY2024 GIR was due by June 30, 2026 (the general deadline for calendar-year groups in most implementing jurisdictions), the June 2026 XML schema guidance arrived just in time for that first filing cycle.
The FY2025 GIR will generally be due by June 30, 2027 for calendar-year groups. The FY2026 GIR (the first year in which the SbS election is available) will generally be due by June 30, 2028.
Practical compliance sequence for a calendar-year US-parented group in 2026:
FY2024 GIR: due June 30, 2026 in most implementing jurisdictions. Full GloBE calculations required. No SbS benefit.
FY2025 GIR: due June 30, 2027. Full GloBE calculations required for 2025 (transitional UTPR Safe Harbor expired December 31, 2025). Pre-SbS UTPR readiness is needed for 2025.
FY2026 GIR: due June 30, 2028. SbS election available. GIR scope reduced by SbS election for IIR and UTPR. QDMTT data still required for implementing jurisdictions.
The Grant Thornton analysis confirms: US MNE groups should prioritise FY2024 compliance readiness for the first GIR filing cycle, including a clear documentation strategy and data readiness, particularly in jurisdictions where the transitional CbCR safe harbor does not apply.
What ASC 740 Disclosures Are Required for Pillar Two in Your 2026 Annual Filing?
The ASC 740 disclosure requirements for Pillar Two in the 2026 annual report are affected both by the SbS election and by the expanded requirements of ASU 2023-09 (effective for calendar-year public business entities for fiscal year 2025, so the first full Pillar Two cycle under ASU 2023-09 is the 2026 annual report).
Four specific disclosure areas require attention.
Rate reconciliation. Under ASU 2023-09, the rate reconciliation must separately quantify line items exceeding the 5% materiality threshold. Where QDMTT liabilities in aggregate or in specific jurisdictions exceed the 5% threshold, they must appear as separately quantified line items. If the SbS election has eliminated IIR and UTPR liability, and QDMTTs are the only remaining Pillar Two exposure, the rate reconciliation should reflect those QDMTTs in appropriate jurisdiction-level or category-level reconciling items.
Accounting policy. The 2026 annual report should disclose the company's accounting policy for Pillar Two taxes, specifically confirming the SbS election where applicable and describing the basis on which QDMTT liabilities are calculated and recognised.
Quantitative income tax disclosures. The ASU 2023-09 expanded disclosure of income taxes paid by jurisdiction, where material, requires that QDMTT payments be attributable to the jurisdictions in which they arise. This data will need to be mapped from the GloBE calculation system to the ASC 740 footnote.
Material uncertain tax positions. Where uncertainty exists about whether the SbS Safe Harbor will be respected by specific jurisdictions that have not yet adopted the SbS framework into their domestic law, or where uncertainty exists about specific QDMTT calculations, those should be evaluated under ASC 740-10-25 (the more-likely-than-not threshold for uncertain tax positions) and disclosed if material.
SAB 74 considerations. The forthcoming proposed regulations for the SbS framework may include additional clarifications. If any aspects of Pillar Two treatment remain unsettled at the time of the 2026 annual report filing, SAB 74 principles suggest disclosing the nature of the uncertainty and the expected effect when the issue is resolved.
What Should Your Tax Director Be Doing Right Now?
Five specific actions for the tax director before the Q2 2026 provision is finalised and before the FY2024 GIR is due.
Confirm the FY2024 GIR filing status. For calendar-year groups, the FY2024 GIR was generally due June 30, 2026. Confirm whether the filing was completed in all implementing jurisdictions where the group has constituent entities. If any FY2024 GIR filings are outstanding, address them immediately. The FY2024 filing uses the OECD GIR XML Schema v1.0 released in June 2026.
Map QDMTT obligations for FY2026. Identify every jurisdiction where a constituent entity operates that has enacted a QDMTT. For each such jurisdiction, assess whether the group's jurisdictional GloBE ETR is below 15% and whether a QDMTT liability will arise. Update the 2026 AETR model to reflect QDMTT liabilities.
Confirm domestic adoption status of SbS in each key jurisdiction. The SbS Safe Harbor is only effective in jurisdictions that have enacted it domestically. For each major jurisdiction where the group has constituent entities and where IIR or UTPR exposure would otherwise exist, confirm whether that jurisdiction has adopted the SbS framework and, if so, as of what effective date. If adoption is pending, model the residual IIR/UTPR exposure for the period before domestic adoption.
Document the SbS election in the GIR for FY2026. The SbS election must be made in the GIR. Ensure the GIR preparation team understands the election mechanic and the documentation that must accompany it. The election covers the full fiscal year and all jurisdictions on a group-wide basis.
Coordinate the ASC 740 footnote with the GIR data. The QDMTT liabilities calculated in the GloBE calculations must tie to the income tax provision. Build a reconciliation between the GIR data and the ASC 740 provision for each QDMTT jurisdiction. Any difference between the two calculations needs to be understood and documented before the annual report is issued.
Frequently Asked Questions
What is the OECD Pillar Two side-by-side safe harbor?
The Side-by-Side Safe Harbor is an elective mechanism introduced by the OECD on January 5, 2026, through the Side-by-Side package. It allows MNE groups with a UPE in a Qualified SbS Regime jurisdiction to elect a deemed top-up tax of zero under both the IIR and UTPR for all jurisdictions, domestic and foreign. As of July 2026, the United States is the only jurisdiction listed in the OECD Central Record as a Qualified SbS Regime. The election is available for fiscal years beginning on or after January 1, 2026, and applies across the group's worldwide operations.
Does the side-by-side package eliminate Pillar Two for US multinationals?
No. It eliminates IIR and UTPR top-up tax obligations for US-parented groups that make the SbS election, for fiscal years from 2026 onward. It does not: (1) apply to 2024 or 2025, which require full GloBE compliance; (2) eliminate QDMTT obligations in implementing jurisdictions; or (3) eliminate the GloBE Information Return filing obligation. US subsidiaries in jurisdictions with enacted QDMTTs remain subject to those taxes regardless of the SbS election.
What is a QDMTT and does ASC 740 apply to it?
A Qualified Domestic Minimum Top-Up Tax is a domestic top-up tax imposed by a jurisdiction on locally arising income, calculated under GloBE rules. Many jurisdictions including EU member states, the UK, South Korea, Japan, Australia, and Canada have enacted QDMTTs. QDMTTs are generally accounted for as income taxes under ASC 740 to the extent they are based on income. Current QDMTT expense is recognised when triggered. Deferred taxes may arise for temporary differences in the QDMTT base.
What is the GloBE Information Return and when is it due?
The GIR is the standardised reporting form through which MNE groups report their GloBE calculations to implementing jurisdictions. For calendar-year groups, the FY2024 GIR was generally due June 30, 2026. The OECD released the GIR XML Schema v1.0 in June 2026 for use in that first filing cycle. The FY2025 GIR will generally be due June 30, 2027. The FY2026 GIR (the first year with SbS election available) will generally be due June 30, 2028.
Does FASB's ASC 740 require disclosure of Pillar Two taxes?
Yes. Under the expanded disclosure requirements of ASU 2023-09 effective for calendar-year PBEs beginning with the fiscal year 2025 annual report, Pillar Two taxes including QDMTTs that meet the 5% materiality threshold must be separately quantified in the rate reconciliation. The accounting policy for Pillar Two must be disclosed. Income taxes paid by jurisdiction under the expanded ASU 2023-09 framework must include QDMTT payments. Uncertain tax positions related to SbS election uncertainty or QDMTT calculation uncertainty must be evaluated and disclosed.
Key Takeaways
- The OECD released the Side-by-Side package on January 5, 2026, implementing the G7's June 2025 political agreement. The US is the only jurisdiction currently listed as a Qualified SbS Regime in the OECD Central Record.
- The SbS Safe Harbor allows US-parented MNE groups to elect a deemed top-up tax of zero under both IIR and UTPR for all jurisdictions, domestic and foreign, for fiscal years beginning on or after January 1, 2026. The election is group-wide and must be made in the GloBE Information Return.
- The SbS election does not apply to 2024 or 2025 (full GloBE compliance required for both years), does not eliminate QDMTT obligations in implementing jurisdictions, and does not eliminate the GIR filing obligation.
- The UPE Safe Harbor replaces the expired transitional UTPR Safe Harbor for groups whose home jurisdiction satisfies domestic but not worldwide criteria. No jurisdiction is currently listed. For US-parented groups, the SbS Safe Harbor provides broader relief making the UPE Safe Harbor redundant.
- The Simplified ETR Safe Harbor (permanent from 2027, electable from 2026) allows simplified ETR calculations rather than full GloBE calculations. The TCSH has been extended one year through FY2027.
- QDMTTs in implementing jurisdictions remain fully applicable and are accounted for as income taxes under ASC 740. The 2026 provision must identify all QDMTT jurisdictions, calculate the jurisdictional GloBE ETR, and recognise QDMTT liabilities accordingly.
- The OECD released the GIR XML Schema v1.0 in June 2026. The FY2024 GIR is due June 30, 2026 in most implementing jurisdictions, the FY2025 GIR is due June 30, 2027, and the FY2026 GIR (first year with SbS election) is due June 30, 2028.
- The 2026 annual ASC 740 footnote must separately quantify material QDMTT amounts in the rate reconciliation, disclose the SbS election accounting policy, and address any uncertain tax positions related to SbS domestic adoption timing in specific jurisdictions.
