OECD publishes Pillar Two Side-by-Side System

What happened?

The OECD, on 5 January 2026, released Administrative Guidance containing the long-awaited Side-by-Side agreement or ‘System’ (SbS System) as part of a broader package of Administrative Guidance on the Global Anti-Base Erosion (GloBE) Model Rules or Pillar Two. The SbS System introduces two new Pillar Two safe harbours: (i) the Side-by-Side Safe Harbour (SbS SH) for MNE Groups headquartered in jurisdictions with both eligible domestic and worldwide tax systems; and (ii) the Ultimate Parent Entity Safe Harbour (UPE SH) for MNE Groups with a UPE located in a jurisdiction that has an eligible domestic tax system but not an eligible worldwide tax system. The Central Record for purposes of the Global Minimum Tax was updated on 5 January 2026 to reflect that the United States is an eligible jurisdiction for the SbS SH. Additional jurisdictions may be added to the Central Record in the future.

Why is it relevant?

The SbS System guidance recognises that some jurisdictions may have existing minimum taxation regimes with similar policy objectives and complementary effects to the GloBE Rules. The new safe harbours are expected to reduce the compliance burden on MNE Groups with a UPE located in an eligible jurisdiction. The SbS System is expected to be available for Fiscal Years commencing on or after 1 January 2026. The safe harbours are not self-executing and must now be legislated domestically by each Inclusive Framework (IF) member in accordance with their own processes and timelines (subject to possible European Union (EU) guidance related to the EU minimum tax Directive). The SbS SH, when elected, sets the Top-up Tax otherwise collectible with respect to an MNE Group under an Income Inclusion Rule (IIR) or Undertaxed Profits Rule (UTPR) to zero. The UPE SH, on the other hand, only sets the UTPR Top-up Tax with respect to the UPE jurisdiction to zero when elected. Importantly, the SbS SH does not alter the expected application of Qualified Domestic Minimum Top-up Taxes (QDMTTs) or Domestic Minimum Top-up Taxes (DMTTs).

Actions to consider

MNE Groups should evaluate how electing the SbS SH or the UPE SH could impact their Pillar Two profile in 2026 and beyond, including potential compliance simplifications and changes to reporting and payment obligations. Jurisdictions are generally expected to adopt the SbS SH effective from 1 January 2026, with retrospective application. However, not all jurisdictions may be able to do so given legal or constitutional constraints. MNE Groups should consider revisiting and ensuring full compliance with all GloBE compliance obligations for 2024 and 2025, as the requirements for those years remain unchanged regardless of whether a SbS SH election is made for 2026 or any subsequent year.