OECD Administrative Guidance in relation to ‘side-by-side’ package

• Where the UPE of a group is located in a jurisdiction with a ‘qualified SbS regime’ (i.e. a tax system that that has been granted qualified status including the imposition of minimum requirements with respect to the taxation of both domestic and worldwide foreign income of the group) and has elected for this safe harbour to apply, the SbS Safe Harbour will apply to all of that MNE Group’s domestic and foreign operations. At present, only the US has been specified by the IF as a qualified SbS regime.
• The effect of the SbS Safe Harbour is to deem any top-up tax (under IIRs and UTPRs adopted by other countries) to be zero with respect to all of that MNE Group’s worldwide (including parent country e.g. US) constituent entities, including stateless constituent entities and minority-owned constituent entities.
• The SbS Safe Harbour is intended to apply to fiscal years beginning on or after 1 January 2026 and the Guidance suggests jurisdictions should implement it with retrospective effect, but if this is not possible (e.g. due to constitutional grounds) then it should be implemented from the earliest practical date. In practice, this means that profits of foreign (non-US) entities within US headed groups will likely continue to be subject to the IIR for 2024 and 2025 and the UTPR for one year (2025) even if the SbS Safe Harbour applies for periods commencing 1 January 2026 onwards.
• However, as expected, the SbS Safe Harbour does not affect the application of a Qualified Domestic Minimum top-up Tax (QDMTT), nor can the SbS Safe Harbour be applied in respect of a QDMTT (e.g. any UK constituent entities within a US-headed group would continue to be subject to the UK QDMTT regime). This approach reinforces the taxing rights on domestic profits for the many countries that have adopted a QDMTT as a primary taxing mechanism within the Pillar Two regime. The Guidance confirms that QDMTTs for all MNE Groups must continue to be calculated without the pushdown of parent-level taxes. The Guidance also explicitly states that ’conditional and discriminatory’ QDMTTs will not be recognised as Covered Taxes, which is designed to discourage jurisdictions from seeking to selectively modify or disapply their QDMTTs to make their jurisdiction more attractive to e.g. US headed groups.
• Where the UPE is not located in a jurisdiction with a qualifying SbS regime, then the group cannot apply the SbS Safe Harbour in respect of operations taking place in jurisdictions that do have a qualifying regime (e.g. a UK-headed group could not apply the SbS safe harbour to its US constituent entities, which would continue to be subject to IIRs and UTPRs in all years).
• Where the SbS Safe Harbour applies, groups will have streamlined GloBE Information Return (GIR) filing obligations, i.e. certain sections will not require completion going forwards. GIR obligations for fiscal years commencing before 1 January 2026 are not impacted, i.e. full GIRs will still be required.
• A qualified SbS regime must broadly have been enacted prior to 1 January 2026, and qualifying regimes will be listed in a central record following a review process by the IF. Only the US is identified as a qualifying regime for the SbS Safe Harbour for now, but there is, in principle, an opportunity for other countries with pre-existing tax regimes to request an assessment as to their potential qualifying status, with such assessment to be completed by the end of H1 2026. There is also the potential for a later assessment in 2027-2028 where other countries could qualify.

Introduction of a new UPE Safe Harbour

• This new safe harbour applies for fiscal years beginning on or after 1 January 2026 and effectively replaces the Transitional UTPR Safe Harbour, although it is harder to qualify for.
• A group is eligible for the UPE Safe Harbour where the UPE is based in a jurisdiction with a ‘qualified UPE regime’ which have satisfied criteria ensuring robust domestic taxation and which must have been enacted and in effect as of 1 January 2026.
• When the UPE Safe Harbour is elected, the top-up tax for profits for constituent entities within the qualifying UPE jurisdiction is deemed to be zero for the purposes of the UTPR. This means that profits in the UPE jurisdiction are not subject to additional top-up tax under the UTPR, provided the jurisdiction meets the qualifying criteria.
• As a practical matter, this new UPE Safe Harbor is primarily most relevant for non-US headed groups, as US headed groups will already have a separate exclusion from the UTPR under the SbS Safe Harbour (assuming this is elected).
• The UPE Safe Harbour does not affect the application of QDMTTs. MNE groups remain subject to QDMTTs in all jurisdictions where these apply.

Extension of the Transitional CbCr Safe Harbour (TCSH)

• The TCSH has been temporarily extended by an additional year and now applies to fiscal years starting on or before 31 December 2027 but not including a fiscal year that ends after 30 June 2029. The threshold rate of 17 percent (for the simplified ETR test) for 2026 Fiscal Years will also apply to the additional 2027 Fiscal Year.

Introduction of a new permanent Simplified Effective Tax Rate (ETR) Safe Harbour (SESH) with a 15 percent threshold rate

• This provides a new permanent safe harbour (referred to as the Simplified ETR) intended as a simplification measure, which will apply starting from 2027.
• Under the SESH, where a jurisdiction has a simplified ETR that is 15 percent or above, or has a simplified loss, the top-up tax for that jurisdiction is deemed to be zero without the need to prepare full GLoBE calculations.
• The SESH applies for fiscal years commencing on or after 31 December 2026 (but in some cases may be available a year earlier).
• The simplified ETR calculation is based on the financial accounting data used to prepare the group’s consolidated financial statements (CFS), except where a jurisdiction requires a QDMTT to be calculated based on the local financial accounting standards (although such jurisdictions are encouraged to allow the use of the accounting standard of its CFS for the purposes of the SESH).
  • Certain adjustments are permitted to the Simplified ‘income’ figure including the removal of excluded dividends, excluded equity gains or losses and adding back policy disallowed expenses (such as penalties that equal or exceed EUR 250,000).
  • Taxes in the Simplified ETR calculation are based on the income tax expense reported in the financial statements but subject to a number of adjustments including certain policy adjustments, adjustments for uncertain taxes, taxes which are not payable promptly, recast of deferred taxes to the minimum rate and certain other adjustments. Some optional adjustments are also available e.g. to include certain tax credits as part of Simplified taxes.
  • The SESH includes a simplified approach to the application of adjustments for mergers and acquisitions post filing and transfer pricing adjustments and certain elections under the GloBE rules. Optional adjustments are available for industry-specific circumstances (e.g. insurance and shipping sectors).
  • Applying the above adjustments gives Simplified Income and Simplified Taxes which are used to calculate the Simplified ETR.
• Integrity Rules – to be eligible for the Simplified ETR Safe Harbour, MNEs must ensure income, expenses and taxes are allocated only once to a jurisdiction, following principles of matching, full allocation, single expense and loss, and single tax recording.
• The SESH has various entry and re-entry criteria (as an evolution of the ‘once out, always out’ provisions in the transitional CbCR safe harbours). Broadly speaking, the safe harbour is available for a jurisdiction where that jurisdiction did not have any top-up tax liability in every fiscal year beginning within 24 months before the current fiscal year.
• Whilst the SESH is intended to be a simplified version of the full GloBE ETR calculation, the degree of actual simplification in practice may be quite limited.
• Further work on incorporating some of the above simplifications into the full GloBE rules will be undertaken in 2026 including work on permanent equivalents to the transitional CbCR routine profits and de minimis safe harbours.

Introduction of a Substance-based Tax Incentive (SBTI) Safe Harbour

• A new SBTI Safe Harbour provides for more taxpayer favourable treatment of certain qualifying expenditure-based tax incentives (e.g. the US R&D credit and other jurisdictions with similar incentive regimes), subject to a complex ’cap’ mechanism. The SBTI Safe Harbour can be elected for in a jurisdiction for fiscal years beginning on or after 1 January 2026.
• The SBTI Safe Harbour allows a group to treat the tax value of certain qualified tax incentives as additions to covered taxes when calculating the applicable ETR for the jurisdiction, up to a cap.
• A substance cap limits the amount of the qualified tax incentive based on a percentage of payroll costs or depreciable tangible property in the jurisdiction. The cap is equal to the greater of 5.5 percent of the payroll costs or 5.5 percent of the depreciation of tangible property in a jurisdiction. As an alternative, a cap equal to 1 percent of the carrying value of tangible assets (excluding land and certain other non-depreciable assets) in the jurisdiction can be applied on an elective basis.
• The SBTI Safe Harbour works by deeming the top-up tax that corresponds to a qualified tax incentive (subject to the cap) to be zero. The tax that corresponds is determined by comparing what the top-up tax would be both with and without the election.

• The release calls for a ’stock take’ in 2029 for Pillar Two overall to ‘ensure a level playing field’ is maintained and determine if competitive distortions have been created in view of the Side-by-Side measures and/or the UPE Safe Harbour, including a review of ’QDMTT implementation’. 
• Further work is also signalled on ’related benefits’, such as government grants to police countries implementing and collecting QDMTTs where benefits are indirectly returned to taxpayers.
• An updated Central Record has also been released which confirms the countries with rules which have been added to the list of Qualifying IIRs, QDMTTs and QDMTTs accredited for safe harbour treatment. The updated Central Record also includes a new section for qualified SbS regimes which currently only includes the US from 1 January 2026.

We understand that the UK Government intends to give effect to these measures retrospectively from 1 January 2026 and these will be legislated for within a future Finance Bill introduced in the second half of 2026, following a technical consultation on the draft legislation.

All in-scope groups will need to consider the package components in detail to understand how they are impacted, the financial reporting impacts, how they may benefit from some of the intended simplification measures, how their Pillar Two compliance approach may need to be developed and flexed over time as the new measures start to take effect, as well as monitoring how and when jurisdictions they operate in implement the updated measures. Please reach out to your usual KPMG contacts or the authors to discuss further.

We are currently undertaking a more detailed analysis of the package and will provide details of this in a future edition of Tax Matters Digest.

In addition, two KPMG global webcast sessions are scheduled for 14 January morning (08:00 to 09:15 GMT) and 14 January afternoon (15:00 to 16:15 GMT), focusing on the technical details of the Side-by-Side package and you can register via the respective event page links.

The OECD will be hosting a webinar on the ‘side-by-side’ package on 13 January 2026 (15:00-16:00 UK / 16:00-17:00 CET), which can also be signed up for.

For further information please contact:

• Kashif Javed
• Qasim Javid