The Global Minimum Tax and the US “side-by-side” Agreement

Under its Inclusive Framework on Base Erosion and Profit Shifting, the Organization for Economic Co-operation and Development (OECD) announced a comprehensive package negotiated by 147 countries and jurisdictions to continue implementation of its global minimum tax framework. The new package includes a “side-by-side” agreement essentially exempting the US from many provisions of Pillar Two of the Framework, thus benefiting US-headquartered multinational enterprises.

• The comprehensive package contains material simplifications, greater alignment of substance-based tax incentives with qualified refundable tax credits, and a “side-by-side” system for jurisdictions that have implemented a tax regime which incorporates minimum taxation requirements for the domestic and foreign income of multinational enterprise groups (MNEs) headquartered in that jurisdiction.
• The “side-by-side” provision was essentially designed for the US; nations working under the OECD’s framework agreed to the package after US criticism of the global minimum tax regime led to a separate deal the US made with other G7 countries.
• While the US is currently the only country that qualifies for the side-by-side system, under the new arrangement affected businesses must still comply with all global minimum tax requirements for the 2024 and 2025 tax years and will still be subject to qualified domestic minimum top-up taxes in 2026 and subsequent years.

The OECD/G-20 Inclusive Framework

In April 2021, Treasury Secretary Janet Yellen announced that the US would work with other countries in the Group of 20 to support a global minimum corporate tax to “stop the race to the bottom” and discourage tax competition among countries.¹ The OECD had worked on this effort since 2015, culminating in 2021 with release of an Inclusive Framework on Base Erosion and Profit Shifting consisting of two pillars, including both the global minimum tax and a proposal that would enable multinational corporations, including some US companies, to be taxed in the places where they do most business rather than in low-tax headquarters jurisdictions. The OECD’s definition of “base erosion and profit shifting” (BEPS) “refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax,” which disproportionately affect developing countries.² The OECD claims that BEPS costs developing countries between $100 billion and $240 billion in revenue per year.³

The OECD’s Inclusive Framework (IF) contains two pillars, each potentially affecting US companies. It is a framework which countries can use as a foundation to adopt into their own national tax laws, not an international treaty. It comes into force for every nation that adopts the principles in national tax laws irrespective of whether other nations have adopted them.

Pillar One

Pillar One applies to multinational companies with global turnover greater than €20 billion (excluding companies involved in “regulated financial services” and extractive industries) and profit before tax above 10%, with a lowering of the threshold in later years to companies with global turnover greater than €10 billion.⁴ The Pillar permits allocation of taxing authority to any jurisdiction in which a covered multinational company has earned at least €1 million. In addition, a “quantum” between 20-30% of residual profit (profit exceeding 10% of revenue) will be allocated to taxing jurisdictions based on allocation of revenues.

While Pillar One contains several important provisions negotiated to benefit MNEs, negotiations have been very slow. This applies particularly to taxation of the digital economy. The Pillar One framework also promises “appropriate coordination between the application of the new international tax rules and the removal of all Digital Service Taxes (DSTs) and other relevant similar measures on all companies,” an important assurance for multinational US companies that are increasingly subject to these taxes around the world in jurisdictions where they have no physical presence. It was a major concession from developed countries to agree that some companies incorporated in these countries could be subject to tax based on their sales or online activities alone in other jurisdictions where they do not have physical presence—but this was explicitly contingent on repeal of DSTs. Implementing Pillar One in the US would require the Senate to ratify a treaty, with a two-thirds affirmative vote—a very steep challenge. The Administration opposes DSTs. Canada, for instance, repealed its DST in the face of threatened US tariffs.

Pillar Two

Pillar Two—a highly complex system—includes the following components that apply to MNEs with a threshold income of €750 million:

• A 15 percent global minimum tax,
• An income inclusion rule (IIR) permitting countries to impose a “top up tax” (also known as a qualified domestic minimum top-up tax, QDMTT) when other jurisdictions have a tax rate under the global minimum,
• An Undertaxed Profits Rule (UTPR), which limits an MNE’s ability to take deductions to the extent it is not subject to the global minimum 15 percent tax rate, and
• A “subject to tax rule” (STTR) which can serve to lower the effective rate a multinational enterprise pays in a particular jurisdiction in which it does business to reflect taxes paid to other jurisdictions.

Importantly, the Pillar Two framework document specifically acknowledges “the ambition of the IF members for a robust global minimum tax with a limited impact on [MNEs] carrying out real economic activities with substance[.]”⁵ Pillar Two would also require Congressional approval and was exceptionally unlikely because the IF was seen as ceding US tax sovereignty. Further, in January 2025, the President withdrew the US from any commitments made regarding the Global Minimum Tax,⁶ leading to a situation in which US policy diverged significantly from the changes in international tax led by the OECD and G-20, with implications for US MNEs.

"Side-by-Side" Arrangement

In 2017, the Tax Cuts and Jobs Act included a Global Intangible Low-Taxed Income (GILTI) tax designed to discourage profit shifting, a tax that in some way reflected the goals of the OECD’s BEPS effort. Some in Congress believed that GILTI should have been treated as an equivalent to the global minimum tax under Pillar Two, one reason that Congressional ratification of Pillar Two was always exceptionally unlikely.

In January, the OECD announced that countries working under the IF agreed a comprehensive package to continue implementation of the global minimum tax.⁷ The package contains material simplifications, greater alignment of substance-based tax incentives (tax incentives related to investment which do not trigger top-up taxes), qualified refundable tax credits, and – most important for the US – a “side-by-side” system for jurisdictions that have implemented a tax regime which incorporates what the OECD considers minimum taxation requirements for the domestic and foreign income of MNE groups headquartered in that jurisdiction.⁸

The first simplification is a simplified effective tax rate safe harbor based on a calculation tied to income and taxes drawn from an MNE’s reporting with minimal adjustments. The package also includes the extension of the transitional country-by-country safe harbor for one year to allow for adoption of the simplified effective tax rate safe harbor, a work program to study further reforms to achieve additional clarifications and simplifications, and streamlined reporting obligations.⁹

Further, the package includes a safe harbor to allow MNEs to continue to benefit from certain tax incentives that are strongly connected to economic development in a particular jurisdiction. The new “substance-based tax incentive” safe harbor permits MNEs to treat certain qualified tax incentives as an addition to the “covered taxes” of the constituent entities located in a jurisdiction, with a cap equal to the greater of 5.5% of the payroll costs or depreciation of tangible assets in a jurisdiction. MNEs may also use an alternative cap equal to 1% of the carrying value of tangible assets in the jurisdiction.¹⁰

Most important, the IF also agreed to a “side-by-side” safe harbor and “ultimate parent entity” (UPE) safe harbor for MNEs operating in jurisdictions that the OECD considers have implemented minimum taxation requirements with similar objectives, scope, and impact as the global minimum tax. The side-by-side safe harbor is only available to MNEs with a UPE located in a jurisdiction with an eligible domestic tax regime and eligible worldwide tax regime (i.e., the tax regime effectively achieves a minimum level of taxation of an MNE’s domestic and foreign operations, as determined by the OECD). Electing the new side-by-side safe harbor means an MNE is not subject to the IIR or UTPR. The OECD continues to emphasize the importance of QDMTT, noting that all MNEs remain subject to the QDMTT in all QDMTT jurisdictions in which they operate. By 2029, OECD will assess the GMT and side-by-side systems through collecting data on the effects of each system to identify and address any substantial risks to the goals of preventing tax BEPS.¹¹

Implications for US Business

The Treasury Secretary hailed the side-by-side agreement as exempting US-headquartered MNEs from Pillar Two.¹² H.R. 1, also known as the “One Big Beautiful Bill Act” (OBBBA), made changes relating to the taxation of foreign income and thus connected in some way with the goals of Pillar Two. The law renames GILTI the “Net Controlled Foreign Corporation Tested Income Tax” and the Foreign-Derived Intangible Income tax the “Foreign-derived Deduction Eligible Income” tax, both at a rate of 14% for 2026 and subsequent years. It repealed the Qualified Business Asset Investment exemption from those taxes and set the US Base Erosion Anti-Abuse Act (BEAT) tax at a permanent 10.5% rate subject to specified credits for that tax. These actions likely helped pave the way for the adoption of the side-by-side agreement.

The Administration has consistently opposed the IF, particularly the UTPR, which it views as an extraterritorial tax. During negotiations surrounding OBBBA, Republicans in Congress proposed an additional tax on individuals and entities from foreign countries that impose an “unfair foreign tax,” defined in the bill to include a UTPR and a digital services tax.¹³ Congressional Republicans ultimately dropped this tax from the final version of the OBBBA after the Group of 7 (G7) nations agreed to a side-by-side system with the US to exclude US-headquartered MNEs from both the UTPR and IIR.¹⁴ The G7’s parallel system and US concerns about the impact of Pillar Two on US tax credits led to the OECD’s push to agree to the comprehensive package released last month.

Currently, the US is the only jurisdiction that has a qualified regime for the side-by-side safe harbor. Nevertheless, US MNE groups must still comply with full Pillar Two rules for the 2024 and 2025 tax years, and US MNE groups must continue to comply with QDMTT in 2026 and later years. Businesses should monitor their compliance with Pillar Two during this transition period, especially the temporary extension of the country-by-country safe harbor and planning for the side-by-side safe harbor implementation in the US. Businesses should also assess how tax credits and incentives they receive, either in the US or abroad, apply to the substance-based tax incentive safe harbor.

Endnotes

1. Martha C. White. “Yellen pushes for global minimum tax rate to create 'more level playing field'”. NBC News. April 5, 2021. 

2. “Base erosion and profit shifting (BEPS)”. OECD. February 2026. 

3. “Base erosion and profit shifting (BEPS)”. OECD. February 2026. 

4. Committee for Economic Development (CED). “Update on Global Minimum Tax”. The Conference Board (TCB). May 30, 2024. 

5. OECD/G20 Base Erosion and Profit Shifting Project. “Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy”. OECD. July 1, 2021. 

6. The White House, “The Organization for Economic Co-operation and Development (OECD) Global Tax Deal,” January 20, 2025. 

7. “International community agrees way forward on global minimum tax package”. OECD. January 5, 2026. 

8. OECD/G20 Base Erosion and Profit Shifting Project. “Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two), Side-by-Side Package”. OECD. January 5, 2026. 

9. OECD/G20 Base Erosion and Profit Shifting Project. “Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two), Side-by-Side Package”. OECD. January 5, 2026. 

10. OECD/G20 Base Erosion and Profit Shifting Project. “Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two), Side-by-Side Package”. OECD. January 5, 2026.

11. OECD/G20 Base Erosion and Profit Shifting Project. “Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two), Side-by-Side Package”. OECD. January 5, 2026.

12. “Treasury Secures Agreement to Exempt U.S.-Headquartered Companies from Biden Global Tax Plan”. U.S. Department of the Treasury. January 5, 2026.

13. CED. “Proposed Surcharge on Foreign Taxpayers (Section 899)”. TCB. June 5, 2026.

14. “US Department of the Treasury. “G7 Statement on Global Minimum Tax,” June 28, 2025.